How to use an SBA loan to grow your business

Most, if not all, small businesses reach a point where a small business loan may be needed. It could be to patch up a hole caused by mounting expenses or other unforeseen incidentals. It could also be used where a company is not yet producing sufficient organic operating capital required to spur growth and take the company to the next level. Without the ability to fulfill the next contract or properly market for future business, advancement can become next to impossible.

Business owners must choose wisely where their business is concerned. If a business owner accepts the first small business loan they find, depending on the terms of the loan, it could end up weighing the ship down instead of providing the wind the business’s sails needed to push the ship forward.

But how much of a loan does a business really need? What are the factors to consider when choosing a small business loan? Unless a business owner understands the potential impacts a small business loan can have, the wrong type of loan could end up costing the business more in the long run.

First: Why Does Your Business Need a Loan?

In our experience as bankers, the reasons why business owners get small business loans can be distilled down to two reasons: growing your business or patching up cash flow problems.

Loans to Fund Growth

Funds for hiring new salespeople or staff. Scaling up is a pathway that leads to great things. Hiring new talent will propel you forward, foster growth, and support expansion.

Buying new equipment. New tools, new products, new software, computers, or machines could help you produce your product more economically and efficiently. The cost of purchase will be recouped through improved processes and new efficiencies. An approach like this increases your margins and sends value to the bottom line.

Fund your marketing initiative. Marketing can help you broaden your reach, conquer new territory, and develop new revenue channels. Investing in marketing automation, SEO, or a new website will help you stand tall, even against your toughest competition.

Buying a building. Real estate is an excellent investment. It builds equity and gives you greater control over your circumstances. It can also help you save on rent, decrease your tax liability using depreciation, and expand into a larger space. If you have more space than you can use, you might even think about leasing it out to other businesses to gain another income stream.

Prepare For a Sale. Though your company might be doing just fine at the moment, there are a lot of reasons you might choose to seek funding. For example, if you eventually want to sell your business, you will need to scale up in order to maximize the sale price. This is a complex process that includes training your management team and streamlining your systems to run at peak efficiency.

Finance New Products or Contracts. Another reason to seek business funding is to enter new markets or take on new products. You may even have a product that can be improved with a little engineering. Innovation is an excellent way to renew your place in the market and gain a whole new audience.

Loans to Patch Holes

Gaps in Cash Flow. Yet another reason to seek a small business loan can be gaps in your cashflow that may prevent your business from achieving its goals. Gaps in cash flow can result from: Seasonal drop-off, unforeseen business expenses, payroll expenses, changes in supplier pricing, and many other unplanned circumstances.

Refinancing Expensive Debt. Expensive debt can include daily pay loans, merchant cash advances, accounts receivables factoring. These types of loans are tempting because they are easy and fast to get, and the repayment comes out of your sales. Unfortunately, they generally have exceedingly high rates, no matter how good your credit is. Even if you do get a decent rate, the terms are often restrictive because funding is granted based on a promise to pay it off in a short period of time. Because of these realities, this type of loan tends to eat up your cash flow. As a result, you could find yourself with an even bigger hole pretty quickly and then having to refinance these debts with even more short term, expensive loans, which turns into an ongoing cycle of refinancing expensive debt with more expensive debt.

Payroll Expenses. Payroll and fringes (payroll taxes) are a significant expense. If labor is not well-managed, you might find yourself in a dire situation and unable to pay your employees.

The Solution: Evaluate Small Business Loan Options

The takeaway from all of this is that it is critical to crunch the numbers before you commit getting expensive debt. What this means is that you need to review your financials and consider how the money you seek will ultimately create more revenue. Depending on the type of business you have, it is critical to understand why you want a loan, the costs associated with that loan, how that loan will be repaid, and the amount of time it will take to repay such a loan.

The reason these questions are so vital can be illustrated with two different scenarios.

Scenario 1: A business owner has secured several large contracts that are set to pay out over the next 3-6 months. Without going into too much other detail, assuming the business is otherwise healthy and growing, this business owner may benefit from getting short term, fast financing, even if it is more expensive debt because she will be able to repay the debt quickly, before it starts eating up too much of her bottom line.

Scenario 2: A business owner is barely at break even and decides to expand by hiring more employees so that he can fulfill a new contract. The only issue is that the contract will not be paid out until he finishes the work in 6-12 months. If he takes on high interest rate, short term debt, then he will likely create an even greater cash flow problem in the interim when he has to make daily or weekly payments on such a loan. In that case, a better idea would be to understand the nature of his business (i.e., that his jobs take 6-12 months to get paid) and set himself up with a lower interest rate term loan or interest only line of credit that he can draw upon and then repay as new jobs come in and old jobs finish and get paid.

Of course, these two scenarios are just two of potentially hundreds of different scenarios small business owners face every single day. The point we want to make is that based on our experience, it is critical to understand what the revenue driver is for your business and the time frames for how that revenue comes into your business.

Understanding these fundamentals will help a business owner know what types of financing should be avoided—funding decisions that are quick and convenient are not always the most advantageous for every type of business, but approaching a big bank isn’t necessarily the best way to go, either. Partnering with a lender who specializes in serving small businesses, on the other hand, is always a smart choice. The right lender and the right business financial vehicle is critical to reaching your goals.

IncredibleBank is a preferred lender with the Small Business Administration. We have in our employ some of the top Small Business Lenders in the nation, and we take great pride in helping companies just like yours grow and thrive.

How We Do It

Utilizing the SBA 7a program, we will create a financing solution that is tailored specifically to your small business needs.

Our business experts will help you choose the products and the terms that will help you soar – not sink. We want to see you prosper, and we will work closely with you to ensure your success. We see ourselves as so much more than just another bank and will help you prepare for the future, not just your company’s, but yours as well.

Some of the things you can do with a small business loan include:
  • Obtain working capital to float your business through slow periods.
  • Buy equipment, furniture/fixtures, or property. A longer-term loan helps to lower your monthly payments, which then helps you keep your organic cashflow from day-to-day operations in your business.
  • Refinance short-term debts. You may have borrowed prudently, but your payments may be preventing the stabilization of your monthly expenses. Refinancing this debt can free up more cash and prepare your business for growth.
  • Hire new staff. New talent in the organization allows you to achieve more. It invites diversity and will enable you to take on more clients, boosting the bottom line in the process.
  • Make improvements to your location. Upgrading your work space is a great way to show your employees and your customers that you care. If you are trying to attract a higher quality clientele or raise your level of service, these types of improvements should be done regularly. 

Of course, these are just a few ways our small business customers use their funding. As every company and every industry is unique unto itself, we go to great lengths to ensure your loan is right for you. You can always count on us for expert financial advice, and we’ll always be there for you when it matters most.

Call now to speak with our seasoned professionals. Our small business-centric loan products and business structuring knowledge are unmatched in the industry, and we want nothing more than to be your navigator on the seaway to success.