Just because you can borrow money doesn’t necessarily mean that you should.  Marylou Bove Dewald, principal with Goodman and Bove financial consultants has often observed long-term successful growth of wealth in a company jeopardized by short term actions, such as the unnecessary use of debt.  In banking parlance, the use of debt is called leverage, and the use of leverage, while essential to the growth of a business, must be extremely judicious.  Any good banker will tell you that too much leverage will kill a company more quickly than anything else, but too little leverage will lead to a slower death, unless a business has an abundance of equity capital, which is a rare occurrence.

A common start-up growth error is the financing of capital needs through personal credit cards.  This fast solution for cash can become a hurdle several years later as your business prepares to purchase fixed assets such as equipment or a building.  Credit cards are uncollateralized personal debt and often can’t be refinanced through an SBA loan or conventional bank financing.

A better, though often equally expensive approach is the factoring of accounts receivable.  Accounts receivables are sold at a discount to a factoring organization which in turn actually collects them.  The 5-10% cost of factoring is expensive; however, it converts your receivables to cash in twenty-four hours, making it available for reinvestment.  If you’re growing quickly, even expensive cash can be queen.

Ideally the financing of working capital and fixed assets should be matched with compatible debt.  From an accounting standpoint, having a balance sheet that “balances” simply means that assets equal liabilities plus capital.  However, for a balance sheet that includes debt to truly be “in balance”, current assets (receivables and inventory) must be supported by short-term debt, intermediate-term assets (machinery and equipment) must be supported by intermediate-term debt (3 to 7 years), and long-term assets (land and buildings) must be supported by long-term debt.  This sounds elementary, but you’d be surprised at how often businesses ignore this logic, and as a result become financially troubled. 

Finding financing should not be a quick fix to pressing cash problems, but rather a long-term business strategy.  As you seek financing, look for a long-term relationship and a partner that understands, and is in harmony with your business growth goals.  Like any good business partner, your banker should be willing to negotiate terms which assure that harmony exists between your company’s short and long-term needs.

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