There are so many moving parts in running and building a business that need to go right in order for the business to be deemed successful. The right financing can help strengthen any sized business and every business could afford to be stronger, especially post COVID. Whether your business is 20 or 2 years old, as a business owner you know, or are starting to realize that access to capital is crucial to empower your business. Debt is not bad, as long as there is a cost effective and reasonable way to payback the debt while at the same time using the money to grow the business. The right financing can bring your business to a super profitable level, but the wrong type of financing can hinder growth and break your business.
The best financing for a business is a revolving line of credit, because of its low cost, flexibility and perpetual access.
OPM or Other People’s Money, specifically Bank Money has built countless businesses, but businesses sometimes fail. Even though it may not be a direct result of the financing, the reason could be the lack of financing. Everyday across this country small businesses fail. There are a million reasons why a business fails. The number one reason is lack of sales, which may be due to incorrect financing . The business did not sell enough product or service at prices high enough to cover expenses and realize a profit. If a business’ debt servicing is over or barely under the profitability mark, there is a chance that the business will not survive. For example: If a business consistently runs at 15% Net Profitability and Grosses $100,000 per month, the total monthly payments should not exceed $15,000. This will mean that the company is no longer profitable. When the cost of capital/debt servicing is too high, other bills are often neglected and the business can’t expand. There is an old saying, ‘‘If you're not growing, you're dying’. This is one of the key points of how bad or no financing can affect a business and leave it vulnerable for failure.
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Here are real world examples and reasons why this is the best form of financing, even for 3 completely different industries.
Experienced businesses understand this dynamic and always try to achieve the most cost-effective financing possible. A great example of this is from our clients who own wholesale businesses. Even if the margins are tight, as long as the turnaround is quick, they can access the line of credit and help finance large wholesale orders. The owners can then flip the sale proceeds to more products or just pay down the initial draw. Creating the headroom to scale.
Let’s say that you own and operate a painting business and after years of making the right connections, you are winning more and more large bids. The only problem is that you need mobilization money to get your materials, equipment and workers started. Having a pre-established line of credit available to draw from will help you tackle these jobs.
As your company grows, you can potentially access more capital with a line of credit. Credit lines can increase with good payment history over time and this can happen with any business. For example, maybe you own a Landscaping Service and your sales people have oversold new hardscape projects. This happens all the time in the landscaping industry, as well as the construction & contract based industries as a whole. If an owner oversells his services, the business may fall into trouble when they simply can’t service the demand. A line of credit can help your landscape business bridge the gap to meet demand, by providing cash for materials and labor.
A line of credit is one of the cheapest and most popular ways for a business to finance its expansion and day-to-day capital needs, while at the same time maintaining the correct debt servicing to profitability ratio. Other programs such as Merchant Cash Advances (MCAs) stifle the cash flow in the business because the payback term and high front loaded interest is usually too high to be financially good for the business. Qualifications for a line of credit are more stringent than a MCA high interest rate product, for the simple reason that a line of credit calls for a much lower interest rate: The average cost of capital for a line of credit is 5%, compared to a cost of capital of 30%+ for an MCA. For lenders, MCAs are considered more risky than lines of credit; higher risk equals higher cost of capital. Although MCAs are easily to get approved for, they end up digging the business deeper in bills.
The cheapest money you can use for financing your business is the company cash reserves. Cash on hand for the business is the cheapest because there is no cost to it. The second cheapest and most popular way is with access to a revolving line of credit.
Whether you run a sole proprietorship or a large business with over 200 employees…the wrong financing can destroy your business. If the business is too overleveraged, it will most likely fail to meet creditor obligations and afford operational expenses.
Would you buy a house without a realtor? Most people would say ‘no’. Why?
Because there are so many nuances in the process for buying a house and there may be hurdles to overcome throughout the purchase process. The same can be said for applying for a line of credit. We’ve seen time and time again, clients going at it by themselves without any guidance. 9 times out of 10, the unguided line of credit applicant ends up not getting approved. The bank approval process is intrinsically difficult, that’s why it’s so important to get the right advice and guidance from Line of Credit Depot.
The best way to obtain a line of credit is with Line of Credit Depot. Here is what you need to do:
1. Start Here to begin the pre-approval process.
2. Once you are approved you will be shown what programs your business will qualify for.
3. Then once the credit facility is open, you will have access to withdraw funds from your account.
