Is it time to borrow to grow your business?
Read time: 4 minutes
Now that your business is on track, you have plans to help it grow. The question is how to finance growth. Is it time to take out a first loan?
This is an important step in the life of a business, one that is not without its share of concerns for its leader. Does the SME have the financial capacity for it? Is it ready to shift gears? More importantly, what is the most appropriate financing?
"Aside from wondering about their borrowing and repayment capacity, the stress experienced by many entrepreneurs mainly comes from poor knowledge of the financial tools available," says Valérie Bornais, Manager at BDC's Entrepreneurship Centre in Quebec City. "There are lots of options to fulfill your ambitions."
According to a survey in late 2018, 48% of leaders view a cash squeeze as an obstacle to their investment plans. It’s therefore important not to overlook the leverage effect provided by credit in helping you get more cash.
These tips will help you prepare your loan application to take your business to the next level.
The golden rule: Prepare your business!
Being prepared is essential if you want to persuade your banker to provide a loan.
Not really sure where to start? It may be wise to contact your bank beforehand to get a better idea of its expectations and the criteria that will be assessed.
Why not turn to your network, too? Surely, you know entrepreneurs who have already been there. Advice from peers can help to avoid some pitfalls and adequately prepare.
What needs to be included in a loan application?
Of course, you need to make a solid case. The application must contain the following information:
- the amount of money you need
- the purpose of the loan
- purchasing equipment
- relocating your facilities
- hiring staff
- marketing a new product
- growing internationally
- the expected return
- an up-to-date statement of personal finances
"Entrepreneurs also need to show that they know the market well. What are their competitive advantages? What will they need to grow? What is their strategy to acquire new customers? These are questions they will need answers to," Valérie explains.
To support your application, you will have to provide your financial results with detailed information on your sales, cash flow and operating expenses, along with realistic financial forecasts. Your personal financial history will be put under the microscope as well.
It may also be useful to include information on your successes. Detailing the strategies that worked will illustrate your value as an entrepreneur. Your banker needs to trust that you are able to achieve your goals.
Plan instead of reacting
A growth plan requires planning. But too often, entrepreneurs are more reactive than proactive, according to Valerie. A large order that comes out of nowhere, a foreign business opportunity, and all of a sudden you need financing fast. Yet, in this area, rushing doesn't always maximize your financing options.
"It's important to regularly take a step back to consider the best way to grow your market share," says Valérie. "As soon as your business kicks off, you need to start thinking longer term. That way, you will make more informed financial decisions, such as keeping an eye on your personal credit."
"Often, leaders invest all of their personal funds, in addition to racking up credit card debt, to start their businesses. This could hurt their chances of getting financing when they need it."
Identify and mitigate the risks associated with growth
With a growth plan, you can not only clarify your vision, but also identify your strengths and weaknesses.
- Do you have the equipment needed to increase throughput?
- Will you need to hire additional staff?
- Do you have to deal with a long sales cycle?
- Are you in a highly competitive industry, or, on the contrary, in a market to be developed?
Such an analysis will help you decide on the best strategies to develop your business.
While growing is exciting, you also need to be aware of the risks that come with it. Growing too quickly can lead to higher production costs, which will affect the profitability of your business, or even threaten its survival.
"If the business's sales take off, will it be able to handle a larger inventory or an increase in receivables? It may then require a line of credit to meet its cash flow needs. These are all factors to consider to determine the most appropriate financial tools for achieving sustainable growth for the business," Valérie explains.