Most businesses are launched with dreams of future growth. But there are things start-ups and other early-stage businesses can do now to lay the groundwork and prepare for future growth. They can start by building a credit profile that will help them access borrowed capital when the time is right. That’s not only good business practice — it can expand the range of borrowing options available to finance growth.
You can build a fundamentally strong profile during the time you’re ramping up
You can build a fundamentally strong profile during the time you’re ramping up. Most businesses have to buy supplies or parts or the products they’re selling, and many of the suppliers of these items offer payment terms and report repayment to the business credit bureaus. Establishing good credit with three or four suppliers will help build a business credit profile that could making borrowing easier down the road. It may not guarantee that you’ll be approved for a $100,000 loan a year from now, but it will provide a greater range of options.
Capital is often an important part of fuelling growth, and borrowed capital is what many small businesses turn to when they need extra capital. Many businesses borrow to buy quick-turnaround inventory, purchase equipment, or hire short-term staff — giving business owners an opportunity to increase their profits or add value to their businesses.
There’s a big difference between taking on debt, which many businesses are reluctant to do, and borrowing money to drive growth. Reality TV Series like Dragon’s Den can make it look as though money can solve almost any business problem. Although an influx of capital is not a panacea, a business owner shouldn’t be afraid to borrow if he or she can leverage the borrowed capital into a growth opportunity or increase the value of his or her business. Nevertheless, a small business loan shouldn’t be approached with a cavalier attitude. Regardless of the loan type or the lender, there are always costs when borrowing that should be carefully considered.
A recent U.S. survey conducted by the Electronic Transactions Association (ETA) in which a random sample of small businesses that responded said that they anticipate a US$5 return for every dollar borrowed. The survey further revealed that 96 per cent of small businesses that borrowed money from an online lender said the loan they secured enabled or drove business growth. Business borrowers have a range of options available to them, including traditional banks and online lenders. Understanding these lending options in advance can help to quickly direct businesses to the most appropriate lending source for their situation.
If you need to bridge a short-term cash-flow gap or fill some other short-term need, it might not make sense to borrow over an extremely long term. The accumulated interest over the loan term could make the total cost of the loan quite high. For example, it might not make sense to purchase quick-turnaround inventory that will be sold in a few months with a four- or five-year loan. In much the same way most people wouldn’t consider a 30-year auto loan, the loan term should fit the loan purpose.
The traditional loan approval process at a bank may be too slow to meet the needs of a business trying to respond to an opportunity quickly. The ETA survey cites a Federal Reserve finding that small businesses typically spend an average of 24 hours just researching and completing credit applications with traditional lenders. Online lenders, like OnDeck, have simplified the application process and are able to respond very quickly — within hours instead of weeks. And, once approved, they can deposit funds in a business’ bank account within 24 to 48 hours.
The ETA survey reports that 63 per cent of borrowers who chose online lenders cited the speed of funding, while 57 per cent did so because of the easy application process. A streamlined application process and speed to funding are very important to many of the business owners we work with at OnDeck. Financing can be a great way to fuel business to growth. But that doesn’t mean borrowing, or extra capital, will solve every business challenge. Building a good credit profile and becoming a savvier borrower will help you be prepared when growth opportunities come knocking. What’s more, it will help you determine whether or not a small business loan really makes sense for your situation.