By Kevin Leahy
The decision to borrow money to grow a business has several considerations. First, is the anticipated growth sustainable and profitable even with the cost of debt service? Second, does the company have sufficient assets to collateralize the debt and cash flow to repay the debt? Finally, does the growth fit the long term strategies of the business given the economic outlook both locally and nationally based on industry trends? According to the U.S. Small Business Administration (SBA), growth can be a cause of business failure.
Taking on debt to fuel growth will add cost (interest expense) and impact business cash flow (principle repayments). Market research will help establish the potential sales increases that can be achieved by growing a business. Will the business need to purchase new equipment or move to a larger facility? Will additional staff be needed to support the increased sales? If so, will the increases in revenue be enough to cover the new costs plus provide cash flow to cover debt repayment and interest?
Lenders will need proof of sufficient cash flow, collateral and borrowing ability to approve a loan. A written business plan will help document assumptions made about the future sales if the company chooses to move forward as well as the increased costs. The business plan should include a list of tangible assets that will be used as collateral for the loan. If the business does not have sufficient collateral, what personal assets are available? Is the growth the result of a new contract? If so, some lenders may agree to use the signed contract as proof of repayment ability.
The business plan should include an environmental scan. What is the market outlook in the industry over the next year, three years and five years? Is the industry growing, stable or in decline? Are industry regulations changing or are new competitors entering the market? If so, what plans are in place to overcome any regulatory changes or threats from new competition?
The next step is to find a lender willing to make a loan to the business. A good starting place is the financial institution currently providing banking services. If that is not an option because the loan is not a good fit for their institution, research is needed to find a lender who understands the industry and has capacity to make the loan sought. Our Clatsop Community College Small Business Development Center can assist with this research.
Finally, an exciting new financing tool is “Community Public Offering”, a recently approved law in Oregon that allows Oregon businesses to raise up to $250,000 from Oregon residents through a streamlined offering and disclosure process. Hatch Oregon is a new economic engine behind this new law, and will be doing a statewide “Oregon’s Rockstar Entrepreneur Fall 2015 Tour” to share details and success stories for the local business leaders, elected officials and interested parties.
CEDR will be hosting “Hatch Oregon CPO (Community Public Offering) Release Party: Astoria”, on Wednesday, September 30th, from 5:30-7:30 pm at Clatsop Community College- Columbia Hall.
Entrepreneurs will share investment opportunities, and will be joined by Hatch’s Amy Pearl, who helped drive the new law, Heather Stafford, Assistant Director of Innovation and Entrepreneurship with Business Oregon, and Ruth Miles, small business advocate from the Secretary of State’s office
To RSVP, contact us at firstname.lastname@example.org or phone 503-338-2402.
More details will be forthcoming later in the month.