Why You Should Get Financing Before You Need It
Oct 15, 2024Effective financial management is often the difference between a thriving business and one that struggles. Shannon delves into a crucial but often overlooked aspect of financial planning: securing financing before you actually need it.
Through her experiences, Shannon has found many small business owners are ill-prepared when it comes to cash management and capital needs. If you've built your business without loans, you're undoubtedly doing something right. However, Shannon warns that relying solely on organic growth can backfire when you need external funding to scale and seize new opportunities.
Securing a line of credit or loan ahead of time helps build a credit history, which is crucial when you need significant capital. For small business owners who've never had to take on debt beyond credit cards, this advice is particularly relevant. Shannon compares it to getting your first credit card—initially, your credit limit is low and interest rates high because of the lack of history. Similarly, a business without a credit history may find it challenging to secure favorable loan terms when needed.
Drawing from her extensive background in banking and asset management, Shannon provides insights into how banks view debt. Interestingly, having a history of debt that has been responsibly managed is often seen more favorably than having no debt at all. Banks prefer lending to businesses that can demonstrate good financial habits over time.
In her own journey, Shannon secured a line of credit even when it wasn't immediately essential for growth. This strategic move facilitated simultaneous investments in her business, like hiring new staff and expanding offerings. This proactive approach ensured that she had the necessary funds to achieve her objectives without financial strain.
Shannon emphasizes the importance of consulting your CFO, financial planner, CPA, or bookkeeper before making any decisions about loans or lines of credit. These professionals can provide tailored advice based on your business’s unique financial condition and goals. Exploring different products and banks can also uncover advantageous terms that fit your business’s needs.
Many business owners shy away from debt, but debt itself isn’t inherently bad; unmanageable debt is. Borrowing can be a strategic move to free up capital for essential investments such as purchasing inventory, hiring staff, or expanding product lines. For example, using a line of credit to buy inventory and repay it with sales revenue ensures continuous capital flow for other business needs.
If financial products like lines of credit or term loans are unfamiliar, Shannon advises using this as an opportunity to expand your knowledge. Understanding these financial instruments can provide clarity and confidence in making informed financing decisions for your business.
Shannon also recommends exploring different banks to find the best rates and terms. Building a relationship with your bank, especially where your business checks are managed, can yield favorable terms. Conversely, if dissatisfied with your current services, investigating other options could lead to better financial arrangements.
In unpredictable economic times, having pre-approved financial resources can provide a safety net. Shannon stresses the importance of financial stability, particularly in such uncertain times. A revolving line of credit offers peace of mind and flexibility to address unforeseen financial challenges, ensuring steady business growth and stability.
Shannon encourages entrepreneurs to consider establishing financial tools like lines of credit even if they don't need them immediately. This proactive approach can provide crucial support for future growth, unexpected opportunities, or economic downturns. By understanding the intricacies of financial products and building a solid credit history, business owners can position themselves for success. So, take the time to consult your financial experts, explore your options, and create a financial safety net today for a more secure and prosperous tomorrow. Shannon Weinstein’s advice on securing financing before you need it is an invaluable strategy that all entrepreneurs should consider implementing. It’s about preparing for the future, managing risks, and ensuring your business has the financial backing it needs to thrive in any economic climate.
What you'll hear in this episode:
04:47 Consider a line of credit for financial flexibility.
10:10 Explore bank options and consult financial professionals.
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The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
