Finance Your Business
4 signs that your business needs financing
Business credit is much more than a fix for cash flow challenges—it's a strategic tool that successful companies rely on to grow and thrive. The key is recognizing early enough when you need it, leaving time to secure the funds.
To help you better anticipate a future credit need, here are four examples of when securing financing can strengthen a business.
1. Meeting demand is a strain
If you're too busy to go after all your sales opportunities or provide existing customers with top-notch service, you may need to expand your capacity. Tapping financing could help you buy extra inventory, hire additional staff, upgrade order-taking technology or take other steps to increase your throughput. You could be gaining new customers while better serving existing ones, leading to a positive feedback loop of strong word-of-mouth.
2. The cash cushion is getting thin
The average business owner's cash reserves would over just 27 days of their typical expenses, according to a recent JPMorgan Chase & Co. Institute report.
"If a small business has only that much cash, that's a good indicator that they should look for financing," says Larry Conley, Senior Vice President and national specialty finance manager at JPMorgan Chase. An adequate buffer can help you weather downturns, pay unexpected expenses and take advantage of opportunities such as vendor discounts. Conley recommends seeking a line of credit or a business credit card to complement the cash reserve and extend the buffer to at least 90 days.
3. Your credit card or line of credit balances are consistently high
Carrying high balances on your business credit accounts may hurt your company's credit rating.
For example, if your business has a $100,000 line of credit, and your balance is consistently above $40,000, it may be a sign that you need a long-term financing solution. Taking out a term loan of $40,000 and using the line of credit to cover other expenses that arise could make the debt easier to manage, according to Conley. You would pay off the term loan in predictable, fixed payments over time. Seeking an alternate credit source can also be useful if you're carrying high-interest debt, since it may allow you to pay down the debt at a lower rate. Consider talking with your lender to find an additional credit source to help you better manage your debt.
4. Your business tools can't keep up
Using outdated or inefficient technology or equipment can erode your team's productivity and put you at a disadvantage against competitors. If you're experiencing outages, breakdowns or slowing systems performance, consider whether upgrades could improve quality or output. A number of financing options are available for equipment purchases that allow you to reap productivity gains while conserving cash. The efficiency boost from new tools may also offset the cost of buying them.
Having a clear purpose for capital and taking a proactive approach to obtaining it can help your business grow and compete. Working with a banker who understands your business can help you find the right financing option for your needs.
Ami Albernaz writes on technology, finance and small business-related topics.She is a former lifestyle columnist for The Boston Globe and contributor to The Christian Science Monitor. is a Chase News contributor.