CHAPTER 1 Why You Should Get It When You Don’t Need It
It is better to look for business funding when you don’t need the funding, versus when you are in need of funding. This sounds very counterintuitive because if you have a business and things are going great, you do not think there is a need for funding and some people might even feel that this advice is too dependent on a debt-centric philosophy. However, this advice is based upon two very important points.
Number one, you have the greatest leverage to shop for the best rates when you are not in dire need. Banks, funders, or investors are very nervous about lending money to people who need it. As weird as that sounds the concern is the poor choices that put you in a situation where you have a dire need may still be the very same reason why you may default on the loan that they give you, which creates the first dilemma in this book. Many people who feel that they are in a good financial situation will have to go against the instincts to remain in the comfort zone of no action and arm themselves with the needed knowledge that may allow them to enjoy the greatest benefit from being in their good to great situation.
The second benefit in shopping for funding when you don’t need it is that you are less likely to use it irresponsibly if you are funded. This is a principle that also applies to personal finances. For example, if you get a credit card with a $10,000 limit. What most people don’t understand is that you can use up to 30 percent of that maximum limit before it begins to impact your credit negatively, which means that the $10,000 limit is really a $3,000 limit if you do not want to see any slippage in your credit.
Before one signs up for a line of credit or a bank loan or add to an existing loan, it is understandable to contemplate about whether the business really needs to borrow the money. In such perilous economic times, with rising bills and economic uncertainty, there are many people who choose to stay clear of borrowing money when they believe they have the cash to pay the bills they currently have. It is something that will require someone to understand that situations can change that may also change their calculus. Deciding whether one should be borrowing money is a big decision. There are some critical questions that one should answer before one borrows money, and they include where the money will be spent, whether the business can seek other ways of financing the activities, and if the business can afford to pay back the money that it plans to borrow.
Borrow When Owner Least Expects the Business to Require It
Kassar (2014) advised his readers to only think about borrowing a loan when they least expect the business to need it. While working for a loan brokerage firm, Kassar (2014) had observed many small business owners who on a daily basis are in dire need for business credit, to save their businesses and for their own survival. Kassar (2014) believed that had they called on him much earlier, when at a point when their financial needs were just creeping, applying and securing a loan or a line of credit could have been easy. It is rational, however, that numerous small businesses disregard and overlook the fact that it is even easier to secure a loan or a line of credit when they do not need one, compared to when they are in a dire situation.
Consider an example where at the height of summer and one’s own air conditioner gets destroyed. It is going to cost $30,000 to get another, and since it is a hot period it should be procured quickly. This is a moment in time when no thinking is needed or the business will be at risk. When the business has an existing line of credit for such types of emergencies, the business owner can simply write a check and pay at very low interest rates until the individual figures out the long-term plan (Johnson, 2019). If one fails to make that contingency plan, and then one does not have cash on hand, one can be forced to get a really expensive loan where a high interest can be charged for the convenience of getting the funding that quickly. This is what businesses should avoid.
Business owners tend to have short-term memories. When things are moving smoothly, one probably thinks that it will continue on the same path. However, if one were to learn from the events of the last global financial crunch and the subsequent recession, then it is apparent that things can change rapidly and unpredictably. Nothing is immune from shocks. Compare it to a case where a person takes out a life insurance scheme to help them handle things out of unforeseeable situations, and hence business owners should have lifelines for their entities. The most successful business owners expect the possible problems down the road and make plans accordingly before they hit the business (Debt, 2019).
At this juncture, the entrepreneurs know that they are in a good position to borrow when things are quiet. When the business is moving in the right direction, it is time to examine the contingency plan options. When the cash flow is sound and it is increasing, lenders will be more inclined to give the business funds and even at the best interest rate. Overdrafts might be lifesaver in case of unforeseeable emergencies or during the troughs. Even though there might be some small expenses to obtain a line of credit, when it is procured, one can only pay it if it is used.
For a business with accounts receivable and the industry is indicating growth, and the business has a good credit, then the business is in a great position to obtain credit or even a high line of credit at a great rate (rate that favors the borrower, not the creditor). With a firm that is generating positive income, the owner can be confident that it will also be able to repay the loan, which is something that aids firms and business owners to feel at ease.
There can be cases and situations when the business owners know that they are at a bad position to borrow. On the flip side of the coin, when one waits until they are not able to make their payroll or are not able to pay for the lease, it will be much more problematic to obtain any sort of loan because lenders and even shylocks can be hesitant to advance a loan to a firm that is at the risk of not becoming a going concern anymore, or even being declared bankrupt. When the business owner is desperate, his options decrease and one can be stuck with a high interest credit and short amount of time to repay it, and this leave the business back where it began just some few months ago. It occurs when firms can get drawn into the traps of short-term loans renewals that they have problems moving out of it and at the rates that they struggle to repay. For most business owners, this lifesaver loan can be avoided if the loan is taken when the business is not in dire need of it, and it can repay the loan back with much ease.
The bottom line on borrowing has little to do with one’s relationship with a bank or other factors. When a lender assesses a credit application or some line of credit request, the only issue they are drawn to is whether the business can repay the loan and make payments within the agreed timeline. This doesn’t mean that a relationship can’t help if the fundamentals of the application are strong (revenue and credit demonstrate the loan could be repaid) and the business is the type of business the bank likes to fund. For example, at Doriscar Capital Group I remember sending a client’s file to one of my funders and was able to get the client a letter of intent within three days. What made this remarkable is that the client went to over fifteen banks and had their credit pulled over fifteen times prior to my involvement. A great part of that was because the fundamentals of the application was strong, but more importantly my relationship with the banker gives them confidence that when they get a file from me it usually is in the area that they have an interest in. When a business is already having some turbulent times when trying to make an application for a loan, the business might look like a bad credit risk (Amit and Zott, 2015). The lender may be concerned that even with the credit advance, the borrower would not be able to generate sufficient business and cash fast enough to repay their credit advance on time.
The solution to this problem before the business digs itself into a deeper hole is to seek credit when it does not need it and then repay the credit to create a good credit history. Thereafter, the business can borrow a little money and then repay it. If the business has established some line of credit, it can always borrow against the good credit history and repay the loan on time, and then seek for marginally larger line of credit. Remember that the objective is to get the business to the point where it has sufficient credit available to carry it through rough moments or help the business through growth spurts.
Reference List
Amit, R. and Zott, C., 2015, “Crafting business architecture: The antecedents of business model design,” Strategic Entrepreneurship Journal, 9(4), pp. 331–50.
BDC, 2019, “7 deadly sins in borrowing money for your business,” (Online). Available at: Hyperlink: https://www.bdc.ca/en/articles-tools/money-finance/get-financing/pages/7-sins-borrowing-money-business.aspx“ https://www.bdc.ca/en/articles-tools/money-finance/get-financing/pages/7-sins-borrowing-money-business.aspx [Accessed 26 Sep 2019].
Debt, 2019, “Consumer Credit & Loans,” (Online). Available at: Hyperlink: https://www.debt.org/credit/loans/“ https://www.debt.org/credit/loans/ [Accessed 26 Sep 2019].
Johnson, H., 2019, “How to decide whether you should use a credit card or a loan to borrow money,” [Online]. Available at: Hyperlink: https://www.businessinsider.com/borrow-money-credit-card-or-personal-loan?IR=T“ https://www.businessinsider.com/borrow-money-credit-card-or-personal-loan?IR=T [Accessed 26 Sep 2019].
Kassar, A., 2014, “The Absolutely Best Time to Borrow Money,” (Online). Available at: Hyperlink: https://www.inc.com/ami-kassar/best-time-to-borrow-money.html, https://www.inc.com/ami-kassar/best-time-to-borrow-money.html (Accessed 26 September 2019).