Many entrepreneurs concentrate great effort on increasing sales, and they should. Yet, what if sales are not enough? Debt, when used properly, can be a powerful vehicle for realizing your business vision. Raising equity, or outside capital, is another way. Let’s focus on DEBT.
You’re probably familiar with this standard accounting equation:
ASSETS = LIABILITIES + EQUITY
We all want to increase assets. Net profit directly affects our bank account balance. What if your business is new, with few assets and customers? You probably contributed some form of capital to start the business. If growth doesn’t happen as quickly as anticipated or expenses are higher than original assumptions, personal assets may fall short to fuel business growth.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Debt is a liability. It’s a promise to pay back a known amount at a future, specified date. You will pay interest expenses in addition to the original amount borrowed. The interest rate varies widely; factors include the length of time in business, business and personal credit history, debt term, etc. Obviously, a low rate is better. I prefer credit cards like the Ink Business Cash credit card. The first 12 months are interest-free, so have a plan for paying the balance in full when the rate resets to 15% or more.
Many service-based businesses find business credit cards sufficient. However, not every business is structured similarly. There are plenty of product-based companies that require specialized equipment, large work spaces, additional employees to carry out the firm’s mission, or all the above. Millions in sales are required to generate even a small profit; industry examples include consumer goods and technology.
Before You Apply for a Loan
1. Get your finances in order. If your business is new, loan officers will request detailed, forward-looking financial projections. Take advantage of free resources offered by the Small Business Administration (SBA) or SCORE if you have difficulty preparing the projections. SCORE is an extension of the SBA offering free workshops and mentorship from experienced entrepreneurs. For established businesses, ensure your books are accurate and up-to-date. Loan officers may also require evidence of key contracts already won or previously committed investors.
2. Consider an intermediary. Finagraph is a free tool for business owners that takes your accounting data and provides a high-level view of your business health. The company serves as a loan intermediary between you and the bank.
3. Win clients and use them as collateral for the loan. Don’t take it from me. I recently had the privilege of attending PWE (Prosper Women Entrepreneurs) Startup Accelerator’s Demo Day. Five women-owned companies within Prosper’s accelerator program pitched to the audience, made up of investors and community members. One of my favorite businesses was SOCIAL Sparkling Wine®. Founder Leah Caplanis turned to homeopathic solutions during her battle with thyroid cancer at age 26 and became vegan. Now cancer-free, Leah created an alcoholic beverage that is gluten-free, organic and only 88 calories per serving. At Demo Day, another entrepreneur asked Leah how she managed to grow her business so quickly and gain major traction with grocery retailers. Leah’s reply: “I focus on the pitch to the grocer and secure the contract. Then I use that contract as collateral for the loan.”
The last strategy is a good lesson to many. If you own a product-based business that relies solely on individual consumer sales, you’ll have more difficulty securing a loan because you must attract thousands of buyers to your product. Instead, develop corporate relationships. For an $8 product, you need 2,500 single sales to equal one corporate account worth $20,000.
Still Stuck?
Suppose you exhausted the measures above and are denied a business loan. Here are some other suggestions:
1. Network vigorously. Re-connect with former colleagues and friends. Even if the person is outside your specific industry, he or she may know someone who can help.
2. Consider collaborations. A perfect example of this is my friend Lisa Grovo, founder of Big Heart Tea. Lisa’s company was previously known as Retrailer. At the Big Heart Tea launch party last month, she served Cup of Sunshine — a custom ice cream flavor made in collaboration with Clementine’s®, a St. Louis-based creamery known for its “boozy” ice cream. The flavor was so good that Clementine’s opted to keep it on its menu permanently.
-
You Don’t Want to Retire in Portugal: Here Are Three Tax Reasons WhyRetirement Taxes With the NHR benefit retiring and pension taxes increasing, you might rethink your retirement plans in Portugal.
-
Home Depot's Winning Ways Fueled Its 100,000% ReturnHome Depot's wide moat leaves little room for competition – and shareholders have profited as a result.
-
Financial Pitfalls to Avoid in Your 30s, 40s and 50sAs you pass through each decade of working life and build wealth for retirement, watch out for the financial traps that can hinder your progress.
-
Four Action Items for Federal Employees With $2M+ SavedIf you can't stand the chaos, maybe you can walk off into the sunset of retirement. Here are some thoughts on how to figure out if that would work for you.
-
How to Help Accelerate Support for Women's EqualityIt's International Women's Day, and the theme this year is Accelerate Action. Here's how we can all pitch in to help drive gender parity.
-
How to Help Shield Your Retirement From InflationPicking the right investments at the right time can help ensure inflation won't flatten your retirement savings. Here are some tips.
-
Six Steps to Simplify Your Estate for Your HeirsA simplified estate strategy will expedite the settlement of your estate after you're gone, lower audit risk, reduce costs and cut your beneficiaries' stress.
-
Business Owners: How to Calculate Your Wealth Gap in Five MinutesHow much would you need from the sale of your business to retire without sacrificing your lifestyle? This simple calculation will give you an idea.
-
10 Ways to Refine Your Financial Plan for a More Secure FutureSignificant benefits throughout the rest of the year can be had if you take some time now to revisit your financial plan and adjust accordingly.
-
The Most Important Number for a Business Owner Considering a SaleCompany owners hoping to sell and stop working won't know whether an offer on their business is good enough unless they know their 'wealth gap.'Evan
