Things I wish I knew before starting my first business. #2 Borrowing Money

This is the second article in a series on hidden or unexpected challenges that #Entrepreneurs and #SmallBusinessOwners face on a regular basis. (Click here for an introduction to the series with links to other topics.) Here, we will discuss having access to cash before you need it, because it is often difficult to get cash right when you need it. (We are going to limit the scope of this to Lines of Credit, not #StartupFunding - that could be an entire series by itself.)?

Yes, that means get access to money when you don’t need it. Wait, I am busy and it isn’t a priority right now, you say? But, go ahead and invest the time to get the Line of Credit that you may need someday. Why? Because when you do need cash, then the chances are that you are REALLY busy and won’t have time to get it. Or, you may be going through some kind of transition and your financials may not look as strong as they once did, so you may not be able to get the money that you need, or your rate may not be as good as it could be.

Still skeptical and think you are too busy? Here are some scenarios that may cause you to need access to money. Chances are high that at least one of them will happen to you during your #BusinessOwnership.

1. A surge in business. Wait, that would mean that I sold more than normal, so I should have more cash on hand, right? The answer is, maybe. There are lots of different scenarios for lots of different types of businesses, but it all comes down to this. Often, there is a gap between the time you pay your vendors for products or services and the time you get paid by your customers. If you have large companies as vendors, it is increasingly common for their A/R (Accounts Receivable) Terms to be 45, 60, or even 90 days. You have to have cash to bridge that gap. The longer that gap is, the more potential you have for needing access to extra cash. Of course, there can also be a gap between when payroll is due, especially if you have an unusually high amount of overtime, and when you get paid by your customers.?
2. A cyclical drop in business. This one makes a little more sense. Lower sales, means lower revenue, which means you may have to come up with extra cash to cover things like payroll, rent, or a committed level of supplies from a vendor. This may be a seasonal decline, like many of us in the B2B world experience near the holidays, or it may be a monthly decline, where you have higher sales at the beginning or end of a typical month.?
3. Unexpected events. Unexpected events can cause a surge in business, if you are lucky, but usually, they cause a decline in business. Of course it could be a one-time event that impacts your business. Hurricanes come to mind for us in Florida - 11 days without power or water and months of cleanup after going through the eye of Hurricane Ian certainly had a major impact on businesses in southwest Florida. Does anyone remember the bridge collapse on I-85 in Atlanta in March of 2017? That had a major impact on traffic patterns in the north half of the city. My customers and vendors couldn’t get to my main production facility, and my drivers and sales people couldn’t get out of the office because of traffic. That had a major (negative) impact on business for over a month. I remember being out of town in April 2017, being 20 days (2/3) into the month and sitting at 17% of my expected monthly revenue. That was NOT the time to be finding a Line of Credit.Everybody who owned a business in 2020 remembers the PPP (Paycheck Protection Program) loans, right? They were great and helped many of us survive a very very low point in our businesses, but they didn’t come through overnight, or next week, or in many cases next month. A Line of Credit helped many of us survive that time where our revenue was significantly reduced to the time when the PPP money actually hit our bank accounts.?
4. An opportunity to grow through Acquisition. M&As (Mergers & Acquisitions) almost always cause a change in cash flow. There are startup costs to consider, which may include buildout, moving, legal, and HR costs, just to name a few. You probably don’t want to finance an acquisition through a Line of Credit, but that is a different topic for a different day.?
5. An opportunity to grow Organically. Maybe you have been thinking about opening a second location and a great space for it unexpectedly opened up. It may take some cash to secure that location, if it is in high demand, and it will certainly take cash to buildout and start your new location. If you don’t have a Line of Credit already established, then the opportunity may be gone by the time you have access to the money.?

A hidden theme in this list is that Lines of Credit should be used to bridge gaps between expenses and revenue. They can, but probably shouldn’t, be used for longer-term debt, like buying a business or equipment. Those may be better suited for a more traditional loan or a capital lease. Again, this article does not cover traditional loans or SBA-backed (Small Business Administration) loans, as that could also be a series of articles by itself.?

What you should take from this is that Lines of Credit are a very useful tool that cost virtually nothing to setup and maintain, and they provide flexibility to react quickly to unexpected or planned events that occur in Small Business all the time.?

Please ask any questions in the Comments section below. Alternatively, you can message me with any specific questions that you may have.?

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