Small Business Loans: When You Need Them in Your Business Lifecycle

By Claire Parker, Staples® Contributing Writer

The full lifecycle of a business is just like our own — conception, birth, adolescence, maturity and mortality.

It takes money to move through each phase of business life, but how do you know what kind of money you need to keep your business moving to the next stage: seed, start-up, growth, establishment, expansion, maturity and exit?

Be the gatekeeper of the company’s financial direction by keeping an eye on cash flow projections, advises Burke Alder, vice president of marketing for South Jordan, UT–based Lendio, which recently partnered with Staples to help small business owners explore loan options.

“It's a lot better to get a loan before a financial crisis, rather than during it. Banks are a lot more likely to lend to a healthy company,” Alder says.

Seed and Start-Up Stages

When you open a business, securing funding can be tricky. Banks often require at least 12 months in business in order to consider a loan, yet many entrepreneurs don’t have the capital required to get the company that far.

That’s why Chris Callahan, vice president of business banking at Winona National Bank in Winona, MN, suggests concentrating on two main areas in the early stages:

1.    Revenue and expenses. “Many business plans will lay out revenue and expenses per month, establish realistic targets, and plan for anticipated changes,” Callahan notes. Include a two-year projection that answers questions pertaining to the kind of money, and the amount, you need.

2.    Cash flow. Line up those monthly projections to get a higher-level view of your cash flow situation. “Making a huge investment in starting a business and not planning for the amount of cash on hand needed to operate can kill the business before it starts,” he adds.

Taylor Johnson, chief operating officer at consulting firm BusinessPlanToday in Wilmington, DE, suggests looking specifically at SBA Loan Programs that often cater to first-time business owners with reduced “money-down” percentages. These loans do have eligibility requirements, such as time in business or equity, so be prepared to have proper documentation, good credit and other qualifications check-marked.

Other options include express loans (flexible financing) and microloans (small amounts offered by nonprofit community lenders). “A microloan can be obtained with some form of collateral to get up to $50,000 for inventory, furniture or working capital,” Johnson explains.

You may also be able to leverage your good credit rating for funds during this phase. For example, when launching White Rose Family Chiropractic, LLC in York, PA, Dr. Angela Lindenmuth used a line of credit to supplement equipment purchases necessary to get started.

Growth Stage

In this stage, your business is gaining traction and much of the profits are being put back into the business. This is the period when you might enlarge product or service offerings, add a location or increase production or headcount. And since your business is stable and growing, banks are usually eager to work with you — though that doesn’t cut down on the documentation required.

“Businesses that need access to cash and plan to repay in less than 12 months may benefit from a credit line that can be used as needed,” notes Callahan. “For items that will be repaid over more than 12 months, a loan with a fixed rate is usually most appropriate.”

Several types of loans are good for this phase:

  • Expansion loans can be short- or longer-term and are used to physically expand space or staff, enlarge your service area or product offerings, or buy equipment.
  • Bridge loans are short-term vehicles that span gaps in cash flow, but carry high interest rates and usually require collateral.
  • Working capital loans provide near-term cash to cover payroll or accounts payable.

While you may be tempted to go on a spending spree in this stage, Alder cautions business owners to protect current assets with a capital buffer because costs are usually higher than you think.  “Have the money from a loan available before an expansion, instead of being forced to find capital halfway through an expansion project because you underestimated the cost,” he advises.

After five years in business, Lindenmuth is using a mortgage loan to buy a new office, and that same line of credit in anticipation of bringing on an additional chiropractor. “I plan to hire later this year, and the line of credit will be used to subsidize the associate’s salary until he or she is established and generating revenue for the business,” she explains.

Established and Expansion Stage

In this stage, your business is now a fine-tuned, profitable machine and your focus becomes managing the funds. Expansions continue as paying down debt and managing tax liability become additional priorities.

For companies in this stage, Callahan says, “The decision to borrow the money for a purchase or current expenses is based on what is best for the business at the time, not out of pure necessity.” Strong financial performances give companies the leverage to shop around for lower rates and fees when considering:

  • Acquisition financing, such as a line of credit or traditional loan, to buy another business.
  • Construction and expansion loans to fund long-term investments in property, plant and equipment.

While you should always understand the tax implications of financing, it’s especially important in this phase to include your accountant in your decision making because he or she can help you choose options that decrease your tax liability.

Maturation and the Grand Finale

Most businesses in the mature stage don’t require loans, as this is typically the time when any outstanding loans are paid down. It’s also a popular time to deploy an exit strategy: close or sell.

“Since the business has a track record with the current bank, the bank will look at the experience, financial strength and history of the new owners to navigate the deal,” Callahan explains.

From beginning to end, the lending process is a constant in the life of a company. With this information in hand, you can chart a path to success knowing what kind of funding is available along the way.

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