It may sound counterintuitive, but successful businesses borrow money. Even those with plenty of cash on hand borrow money to run operations more efficiently and take advantage of opportunities that arise.
Having a good relationship with your lender plays a key role in growing your company. A good lender can give advice on improving your business credit score and how to use loans to expand and grow your business.
Here’s a look at how borrowing money can improve your credit, create better cash flow, grow your business, and make it easier to ride out slow periods.
How loans improve credit
A successful business uses financing to not only keep their business competitive, but to build up credit by paying back their loans and lines of credit on time.
If your business doesn’t have a history of paying loans back on time or doesn’t have a history of taking out loans at all, you won’t have a good credit score and may not be able to access capital at critical times.
This could mean there’s a great opportunity for expansion in your industry but you can’t get capital because you don’t have a credit history. Or you encounter an unexpected financial hit and can’t get short-term funds to keep your business afloat.
Borrowing money when things are good, so that you know you can pay the loan back, will help your business tremendously when there’s an inevitable downturn.
It’s also vital when improving your credit to have a close relationship with your lender. They can help advise you on your ability to pay back a loan and what steps you should take to increase your credit score over time.
Borrowing helps improve cash flow
Unfortunately, many businesses operate with a cash flow gap. It’s that time between paying for inventory and receiving cash for selling that inventory, or the time in between performing a service for a client and receiving payment for the invoice from said client.
If you need to spend money on labor or stock but have a delay in getting that money back, you may be left short on cash for day-to-day operations. Fortunately, a business line of credit or business loan can help bridge that gap.
At Crown Bank, we have a variety of cash management services to help you maximize your cash flow and offer personal advice to small businesses in the Minnesota community.
Financing can fuel growth
Opportunities for growth can be fickle. Every company will have that golden opportunity at some point to expand the business and take advantage of a momentous time and place. But not all businesses will have the cash.
To take advantage of critical moments, successful businesses know they can do it with borrowed capital.
With an influx of capital at the right time your company can:
- Hire employees and retain high-level talent to grow the business
- Update or replace equipment
- Purchase additional property (i.e. storefronts, warehouses, office space)
- Acquire additional businesses
- Launch new products or services
- Buy inventory in bulk
When loans are used for long-term growth, it provides companies with an influx of cash at the right time.
Loans can help your ride out slow periods
Seasonality can be a game changer in business – it can also produce financial peaks and valleys that are hard to weather. Holding onto all of your cash during the peak season to cover slow sales periods means the company may be missing out on opportunities to expand and grow.
All of the hard work and sales will be unused for large portions of the year when it could be put to work for long-term growth. Instead, build up your company’s credit and tap into loans in a strategic way to cover operational costs in plateau periods.
In any industry, unexpected events can occur that cause financial strain. Having a history of paying back credit and loans lets lenders know that borrowers are reliable and makes them more likely to provide favorable terms.
Have questions about loans?
Partnering with a community bank means getting focused attention and guidance from a banker who knows who you are, understands your business and is ready to help you grow.