So you realize you now have the option to obtain financing. Your credit is good, you are on steady ground, you have collateral, and you may even have been approved for a loan. How are you going to spend it? If you are already considering applying for a loan, you likely already have plans for it. There are some truly legit business reasons to get a loan, and good financing managed properly can help a business bloom. Used in the wrong way however, financing can turn into a circle of debt that will kill your business. Here is how not to spend a loan.
A loan is not intended to cover everyday expenses. If you need financing to cover the day to day expenses of your business, there is a bigger issue. Here is what will happen. You will use your loan funds to cover recurring expenses until the funds are gone. The thing is, the expenses do not go away. They are still there, and you are still needing funds to cover them because you are still paying back the loan, and therefore you need another loan, and so the cycle begins.
The copy machine is broken again, the laptop is needs some work, or you have a broken window. These are all things that need to be tended too, but a loan is not the way to do it. The interest on a one-time loan will likely cost more than the original need in the first place. The only place to get a loan for a small amount of money is a cash advance type lender usually, and the benefits definitely do not outweigh the costs.
Maybe you need a new printer or laptop. Perhaps the microwave in the breakroom is out. Don’t go take out a loan to cover these types of items. Are they a necessity in the business? Maybe. But there are better ways to take care of these types of expenses.
The Bigger Picture
There may always be gaps between cash flow and recurring or non-recurring expenses. This is the nature of business, and if the problem is truly a cash flow lag, then there are better ways. Perhaps you could budget for potential one-time expenses such as replacing the microwave or repairing the copy machine. The repairs and maintenance budget may need to be tweaked.
If recurring expenses are consistently an issue, a revolving credit line or reasonable business credit card with rewards is a better option. These can be paid off when the cash comes in and then the whole process can be repeated the next month with little hassle.
If the problem is deeper, with a lack of cash at all, then any type of financing is only going to cause more problems. Some consideration needs to be given as to how to increase profits so that the business can handle its expenses.