There are several ways to think about how best to get a small business loan, how much to apply for and how the funds will be deployed in your business.
As business success is often attributed to critical thinking, one approach to help guide your decision making process when applying for business funding is to determine what date in the future will your business (as a result of the funding) increase revenue. In short, how do you identify the the ‘inflection point‘ in your business post funding when you can see the increase sales, efficiency or profitability from the business loan and the lender is repaid.
This can be easy to identify in cashflow forecasts where revenues begin to increase as a result of more sales. For example, having increased inventory at a jewelry store can result in more sales transactions as customers have greater choice. Doctor clinics can see improved profitability gained in new medical equipment purchased or a restaurant expansion can result in greater capacity of seating and more turnover of tables to increase revenues.
Before applying for your business loan, you should determine when this inflection point will occur and then begin to write the business plan accordingly. Following on from this, your business plan should also provide the lender with insight as to the timing of when you will need the business funding and for how long. An important part of the process is to be able to have a clear vision as to what you are going to do with the money.
A major objective of your business plan is to create confidence in the lender that you know what you are doing and that that you will be able to pay them back. To do this, a business plan and financial forecasts that explain how you plan to reach this point of inflection is key. In other words, be sure to show the lender how the business makes money with the use of the proceeds from the small business loan.
As our loans management team speak to hundreds of small businesses each week, the importance of being able to articulate how your business will use the business loan proceeds is very important. Some of the most common uses for business loans include:
1. Local Marketing During High Seasons
For businesses that are impacted by visitors to a particular area for a short period of time each year, it is often necessary to advertise more frequently during those peak visitor periods. Visitors to your business region will read local newspapers, see outdoor advertising or be drawn to marketing brochures distributed in their hotels or motels offering promotions.
View a video testimonial from Gregg LaPenna, owner of Whales Tale Oyster Bar & Seafood Grill, who speaks about the need for local marketing and his experience with United Capital Source in applying for a small business loan.
2. Bulk Buying for a Discount
Wholesalers who buy from manufacturers and retailers who product buy from distributors seek to gain pricing competitiveness when larger quantities of products can be secured at lower prices. Buying bulk at a discount allows businesses to offer very competitor prices to consumers. Seizing this opportunity is often not achievable from existing cashflows and a business line of credit or working capital loan is required.
Before ordering the exact quantity in bulk, it’s important to plan. Speaking with your sales team, operations department or customer service agents is important. A clear plan on how to sell the additional inventory is the planning required as opposed to applying for a small business loan and later deciding how much to buy in bulk.
By focusing on the inflection point of your business, when sales and profit will begin to increase exponentially above and beyond fixed costs, you will be able to better forecast your business funding requirements.
3. Expanding Locations
United Capital Source has financed over 50 quick service restaurant franchise chains including Bojangles, Burger King, Dairy Queen, Dunkin’ Donuts & Papa John’s to name a few. Businesses running these single franchise outlets mainly understand that at some point, there is a diminishing return and throughput capacity in a fast service food & beverage business for additional expenditure. At some point, franchise owners must seek new geographies to launch new stores or outlets and grow sales.
United Capital Source is very experienced in helping franchise operators obtain business funding for expanding locations. Our funding team are familiar with the nuances required to ensure successful loan applications.
4. Real Estate Acquisitions
Over time, your business will hopefully have a repeat loyal customer base, consistent sales and profit margins along with predictable expenses. As retained earnings in the business accumulate and rent as an expense increases, many business owners will look to buy the property or building in which their business is located. Warehouses, factories, hardware stores, car rental and even restaurants or dry cleaners where often the proprietors live above their businesses.
Tens of thousands of American businesses are operating businesses that instead of paying commercial rent to a landlord, they are paying a mortgage over the commercial property. As with most residential mortgages, commercial property loans have offset accounts where cash bank balances from the business account can offset the interest payments for the property loans. Equally, these offset accounts are sometimes used to redraw from to provide cash-flow to the business. In these situations, commercial property loan interest rates will differ from working capital loans which may be a better option for the financing for your small business.
United Capital Source has experience with businesses which own their real estate and can advise on the best small business loans compared to commercial property loans with offset facilities.
There a various ‘inflection points’ in businesses and each industry has different points to consider when applying for a business loan. Finding the point where sales and profitability will increase from the loan proceeds is a critical part of the business planning and business funding process.[/vc_column_text][/vc_column][/vc_row]