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Tips for financing your growing business

An annual financial plan can help avoid cash flow crunch

4-minute read

Is it time to go shopping for a major purchase for your growing small business? It can be hard not to get swept up in the excitement.

Whether it’s a major technology upgrade or shiny new equipment, you will probably spend hours shopping for the best product, comparing reviews and talking with vendors.

Then comes the hard part. How do I pay for it? Here’s where many entrepreneurs could be doing a better job.

Financial planning is critical to make sure your investment doesn’t stretch your cash flow and sink you.

The dangers of high growth

“Growth can put an enormous strain on the cash flow of a company,” says Patrice Bernard, Senior Vice President, Products and Shared Services at BDC.

Small business owners often make the mistake of financing growth out of their cash flow or by cobbling together a patchwork of smaller loans for each individual purchase, Bernard says.

The result can be poor financing rates and repayment conditions. Or even worse—the company may suddenly become caught in a cash flow squeeze. And then it may be too late to line up financing.

“It’s as if you used a credit card to finance your home renovations. Your cash flow would be really affected,” Bernard says.

Bad financial planning is especially common—and risky—at fast-growing companies. “You need to plan more if you’re expanding because you usually have much higher accounts payable and receivable,” Bernard says.

Use financial planning to protect your business

The solution is to take time to do a financial plan for upcoming investments, preferably at the beginning of each year.

The first step is to work out how much financing you’ll need based on your overall business growth plans.

Next, meet with your financial partners early on to discuss your plans and brief them about your needs for the coming year. This is the time to secure a credit line for your upcoming investments, which you can draw on as needed and then convert into long-term debt at the end of the year.

Plan ahead to get financing

The idea is to plan your financing to have the best possible conditions for your debt. The exercise may even show that you need more than one financial partner to give you enough flexibility.

And never pay for large expansion projects out of your cash flow even if it looks like you’ve got oodles of extra cash on hand right now.

“That’s a big mistake,” Bernard says. “When cash flow is good, you think it will always be like that. But if a company is growing, it has to invest much more than other companies. And profits usually won’t be enough to cover your investments.”

Growth—an opportunity to organize your finances

Rob Read always used self-financing at his rapidly growing fire extinguisher maintenance company, Bison Fire Protection, as it ballooned from five to 50 employees over a decade.

But when Read and a partner decided to expand into new lines of business, such as fire alarms and sprinkler services, they realized they needed better financial planning.

They brought in an outside consultant to help them plot out their overall business strategy, including laying out a financial plan. The exercise led them to do their first budgeting and forecasting. They also added a line of credit and overdraft protection to their financial mix to make sure they had money lined up before they actually needed it.

Equally important, Read says, he began holding regular meetings with his bankers to discuss future needs. “They’re partners in our business. They’re definitely part of the team.”

Ways to finance your growth

Thinking about how to finance your growing company? Here are some tips.

1. Talk to your suppliers

Consider asking vendors for financing for a purchase. Many are willing to offer a loan if it means a sale—a win-win for the supplier and you. And if you’re a supplier yourself, think about offering customers financing. It could become a new revenue stream and boost sales at the same time.

2. Speed up cash flow

Every entrepreneur knows productivity is important. But how many focus on the productivity of their cash? After all, faster cash flow is a big competitive advantage. Consider offering customers creative terms to speed up cash flow—such as a 2% discount to those who pay within 10 days. This is costly, but getting cash quicker can mean more peace of mind and a reduced line of credit.

3. Focus on quality clients

Some customers are slow to pay because their cash flow isn’t great. Sometimes they’re not worth the effort or risk. A trademark of well-managed companies is a focus on high-margin, quality customers. They translate into smoother finances and fewer surprises as you grow.