First, let’s get one thing straight: borrowing money is NOT a sign of business weakness.
Many consider borrowing just a last-ditch attempt to save an otherwise hopeless venture.
Conversely, however, borrowing can be crucial for growth.
Borrowing can be a catalyst for expansion as well as supplying a buffer for financial setbacks.
In the early years of a hardware operation, borrowing can even be the number one tool to help build the business up from nothing into a solid and profitable venture.
What are the benefits of borrowing?
WHAT DOES IT TAKE TO BORROW?
Whilst the four points above are the principal advantages of borrowing it is not correct to say that borrowing is easy.
Quite the contrary, borrowing money requires proving to a potential lender that you and your store are good prospects and importantly that you will be successful and repay the loan and adhere to the lenders ongoing requirements.
How do you do this? Firstly you need to present a strong business case and do a considerable amount of advance planning (refer to my article in the last issue).
The first step towards obtaining finance – planning – is usually ignored, with dire consequences.
Why? Failure to establish timely, accessible and good lines of credit exposes the business to financial strangulation at the very time the money is needed most.
Planning for credit requirements and facilities is vital for one main reason: lenders want to understand your business, your current financial situation and your plans for the future.
The chances of obtaining an emergency business loan from your bank or finance company in today’s lending climate is the same as a snow ball’s chance of survival on the equator.
Successful borrowing requires developing a sound working relationship with your existing lender and potential lenders in advance.
It means letting the bank know something about your business and how it is positioned financially and I mean not just having a chat over the counter.
Formulating a business plan is crucial, not just so you can provide the bank with the information it seeks on an ongoing basis, but also for your own good management practice.
A business plan describes the structure of the business, past history, profit and cash flow projections (refer to my last article), comparison of latest financial results to previous years and (preferably) to industry averages.
It is important in your relationship with a financier and as part of good credit planning to provide this plan to your bank if possible every year.
It is a good means of establishing your business as a reliable commercial venture in the eyes of your lenders.
This way, when money is needed most, you have the best chance of obtaining it.
Why? Because your operation is known, the lender understands your business, and can use this knowledge to hedge their risk and give them confidence in their decisions.
Just put yourself in the shoes of your lenders – understand how they think and operate – and give them the evidence that you understand your own business.
Peter Cox has spent over a decade training and consulting in the retail hardware industry. He has conducted key-note addresses, and management and sales workshops, which are aimed at improving profitability and liquidity in one of Australasia’s most competitive retail environments. Visit www.petermcox.com.au