When a small business owner needs to enhance the financial strength of his business, there are several methods he can use. A company's financial strength is its ability to consistently generate revenue and meet all of its ongoing business debts. Strength is also the ability to pay debts and still be able to plan growth projects that will allow the company to grow. When a company can flex its economic muscles, then it is able to put itself in a position to be an industry leader and a top company in its field. But before a company can enhance its financial position, it needs to gain stability first.
Most small business owners consider their company's to not be as financial buoyant as they would like them to be. To the truly aggressive entrepreneurs, a company's bottom line can always be fatter and its profit margin can always be expanded. But most business professionals will agree that a stable financial foundation means that a company is able to meet payroll and pay vendor bills with its existing cash flow. While that sounds like the basic premise to any business, it is not nearly as easy as it sounds. Business owners are constantly looking to fill in the financial gaps, and that is where small business loans come in.
The important thing to remember about small business loans is that they can be used to strengthen a cash position, but they should never be the main source of cash flow to a business. If you are going to use small business loans to pay for operational costs associated with your company, then you need to use loans only when they are necessary and only in instances where they will be most effective. A business professional who develops a strong network of financial contacts who can help secure small business loans when needed is going to be much better off than the owner who has to constantly rely on loans to stay in business. Being able to get loans because of the contacts you have made is much more beneficial than using loans as a desperate attempt to stay in business.
A small business loan needs to be used as a tool rather than a source of persistent income. When a business owner is planning a growth project or putting together a marketing plan, his budget will tell him how much cash he needs to borrow. When that business owner has the ability to contact his bank officer and negotiate a loan, then that significantly strengthens his cash position. But when a business owner is constantly asking for bank funding, then that tends to degrade his business' status and could also put him out of business before long.
To better understand how small business loans can be used to strengthen a company's cash position, we can look at a specific example. Let us say that your company is putting together a marketing plan to release your newest product that you feel will give you a strong push in the marketplace. You want to be sure to gain as much exposure as possible, so you add a few new trade shows to your marketing agenda that your company has not participated with in the past. Your cash flow can cover all of your costs except for your trade show funding. That is when you reach out to the bank to fill in the financial gaps and use a small business loan to strengthen your cash position.
An example of how not to use bank funding would be to go to the bank with little or no real understanding as to how much money you need to borrow to complete your marketing plan. You ask the bank for marketing start-up funding, and you are going to try and mix in those start-up funds with your own cash flow to execute the marketing plan. Instead of strategically utilizing your bank funding, you are relying too heavily on bank funding and it will eventually lead to your project running out of cash.
The primary reason why small business loans should only be used to strengthen your cash position and not as a primary source of your corporate cash flow is because small business loans have limitations. The most important limitation is the amount that a bank will let you borrow before your funding will no longer be extended. Your bank will work with you as long as it does not feel that you have exceeded the amount of borrowing that your credit will sustain. You can try to use secure small business loans to get the cash you need, but putting up collateral when getting business loans is a risky move.
One of the other limitations with bank funding is the bank itself. The process of applying for a bank loan can take a while and you are never sure what the results will be until you get the bank's final decision. The bank could decide, for a variety of reasons, to deny your application. Another possibility is that the bank approves your application, but for an amount that is less than what you need. If your project is relying on bank lending to move forward, then these limitations could back you into a corner that you may not be able to get out of.
If your company is having cash flow issues, then you need to explore avenues other than bank lending to solve your problem. But if your company has a strong revenue stream, then bank lending can strengthen your financial status to the point where you can start taking on the bigger competitors in your industry. If you utilize bank lending properly, then you will build up the credit profile you need to be able to get loans for a wide variety of projects. But if you overextend your company's credit by taking out too many loans, then that could lead to long-term economic problems.
If you want to use small business loans properly, then you need to use strategic business planning. With the proper planning, you will be able to get the funding you need through bank loans that will make your marketing programs more effective, allow you to expand your facilities easier, and open a new location without putting significant financial strain on your company finances. It is extremely important that you understand the limitations and the benefits of small business loans at the same time. Until you learn how to properly balance your company's revenue with bank lending, you will be unable to guide your company to financial success.