Your new and growing business may benefit from borrowing money this year. Here are the three most common situations which cause small closely held businesses to borrow money from a community bank such as ours.
Working capital – For most new and growing businesses, having a good accounting system and monitoring cash flow is critical. If you carry inventory and accounts receivable (A/R), maintaining adequate working capital is the life blood of your business. Even if you follow the tips below, having a line of credit to finance A/R & inventory could be a wise investment.
Tip 1: Watch your A/R closely. This means getting the invoices out in a timely manner, making sure you know who has paid on time and who has not, and following up quickly on those who have not. If you generate $1,000,000 on credit each year and your A/R is being collected 20 days later than the previous year, you will have approximately $54,000 less money in your checking account, everything else being equal. The formula is: $1,000,000 / 365 days per year = $2,740 daily sales; $2,740 X 20 extra days to collect = $54,795.
Tip 2: Be aware of stale inventory. You need to be able to track your inventory by type and age and possibly other categories. Some people get so carried away with protecting margins that they hang on to stale inventory waiting for the right buyer. You can tie up a lot of cash over time by holding on to old inventory.
Even if you manage your working capital well, as you grow it may be necessary to have a line of credit in place. If you can take advantage of taking discounts on your payables, or the ability to buy product at a lower cost with a volume discount, or are simply having trouble with your cash flow at times, a line of credit may pay for itself and help you during the peak of your sales cycle.
Capital Expense - This could include purchasing equipment for expansion, efficiency, or replacement. This type of financing is often the easiest to qualify for and there are many different options available from many sources, including banks and commercial finance companies. This could also involve making improvements to a building you already own. Typically if you have equity in your building the easiest source for financing these improvements is the bank that currently holds the 1st mortgage, either with a second mortgage or by consolidating the 1st with the improvement proceeds.
Real Estate – Do you buy or rent? If you operate out of one building, you feel your business is stable, and you can see staying at the same location for a few years without needing to expand that location, you may be better off owning that building. In many circumstances, the annual cash outlay to purchase a building (loan payment, taxes, insurance, repairs, and reserves) is not much different than your lease payment, and sometimes it may even be less. The biggest hurdle to buying your building is often the down payment. There are programs available to help you buy the building your business operates from for as little as 10% down. The structure of these loans can vary widely and is a function of the use, collateral, estimated life of the collateral, and size of the loan, as well as other factors.
If you would like to learn more or have questions, contact one of our commercial lenders. We are with you every step of the way to help you make your business succeed.
About the author:
Jay Cook, Senior Vice President of Commercial Lending
Jay Cook is uniquely qualified for his position as Senior Vice President of Commercial Lending at Marine Bank. As the former owner and operator of three businesses, he knows what it takes to execute a business plan, keep customers happy and make payroll. His entire 30-year career has been devoted to working with the owners of closely-held businesses.