Jennifer Palmer, CEO, Gerber Finance Helping Fast-Growing Companies – Especially Women-Owned – Thrive with Financing, and Partnership
Many of us grew up listening to our parents regale us with horror stories about owing money. These tales ranged from the risks of student loans to the lessons of a relative who racked up credit card debt. But if youâre a business owner, debt can provide you with the funds you need to grow â” from adding new staff and investing in equipment to launching new products and expanding into new markets. Failure to maintain the capital you need can be disastrous for the company you helped build. In fact, an analysis of startup post-mortems from 2018 to 2021 by CB Insights found that 38% failed because they ran out of cash or failed to raise new capital.
Debt is like dating; investments are like a marriage.
There is an allure to the idea of having business investors. But going the investor route can end up costing more because an investor will look for a higher rate of return than the interest rate attached to a business loan or for a stake in the business.â¯When someone offers to invest in your company, think of it as a marriage proposal. Many small companies that grow through investment and sell their firm find their payout smaller than they had hoped.
With debt, on the other hand, you take on a line of credit and then pay it back, so if you sell, you reap all the profits.
Build your credit.
Managing your debt helps build your businessâs credit rating. Unless you borrow money and pay it back on time, your business is not building credit. The lack of credit history or a strong credit rating can make finding financing difficult in the future. Establishing relationships with a strong finance partner can provide you with funding, build your credit history and provide business advice to help you grow your company.
Use debt to grow.
By taking on debt, you receive money now that you pay back later. New funds can help fuel growth, support additional hires and bridge seasonal downturns. Many companies use loans to expand into new markets or add a product line, and for others, the infusion of cash can help fund marketing programs.
Bridge an immediate need.
Businesses seek loans for a variety of reasons. Many times, it is to bridge immediate needs for funds to help with outstanding payments or to fund new opportunities that require a capital increase. For other businesses, loans help them get through challenging times â” such as the pandemic, which caused unforeseen disruptions of supply chains. A loan can be an expedient and effective way to get through a short-term need and help your company continue to thrive.
Learn the dos and donâts of debt.
If you decide to use debt to fuel your business growth, there are some important dos and donâts to understand. First, know who you are taking the money from and what they offer (in addition to capital). Fast may be a priority if you seek an emergency bridge loan to get through a quick downturn or while waiting for a receivable payment. If you are growing and seeking to expand, you may want to choose a finance partner who supports you with needed funds and also offers consulting services to help guide you at this pivotal time.
Second, carefully read the cost of the loan you are taking and the fees associated with the funding. Donât let an emergency need keep you from knowing all the loan requirements and when they are due. Often, there are breakup fees associated with a loan. You want to make sure you understand these before you sign so you arenât surprised when you are about to pay off the loan.
Third, and this is true especially for startups, make sure your personal and business expenses are separated. It is common for many entrepreneurs to self-fund their startups and blend their finances. This blurring of funds makes it incredibly difficult to understand how your business is doing, making it difficult for a lender to come in and approve you for a line of credit. Lenders donât want to see you using the company as an ATM, so youâll want to keep off expenses such as personal automobiles even if you can justify they are often used for business purposes. And if you donât get that line of credit, your business can become overly reliant on your personal funds, damaging your credit and retirement goals.
Sometimes as you grow, you cannot get a loan from a bank without a proven track record. As you scale, you may find your company suddenly attractive to lenders. Fast-growing companies may find multiple offers for loans, and in my experience, business owners often feel compelled to take the money when itâs offered.
Itâs a balancing act. Taking debt financing at the right time can spur business success, but do your homework, read the fine print and seek a partner invested in your growth. Talk to your potential lender about a possible accordion line of credit. Accordions allow you to get credit approved and have a line waiting for you, but you donât need to pay for it until you need/use it.
âLoanphobiaâ comes from a deep-rooted aversion to feeling indebted. If you have this fear, it can help to reframe a loan as something positive, that once you pay it off, allows you to retain total control of your company. In addition to building your credit, you can fund innovations or new markets or add new employees. Debt can help your company grow and secure its future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.