Five Signs Your Business Needs Capital
Knowing when your business needs working capital— and promptly taking action to secure it— can free you to seize a ripe opportunity, steer clear of cash crunches, or simply be smarter about your debt.
How do you know when it might be time for your business to borrow? Look for these signs that your business may be ripe for an infusion of cash.
So, what are the signs getting a working capital loan may be right for your business?
1. You can’t meet market needs
Are sales leads going untapped? Is your team taking longer to respond to requests and fill orders? If demand for your products and services exceeds your ability to provide them, this may be a good time to look for additional working capital.
You may be able to use additional funds to buy inventory, hire more staff or expand your facilities. Funding can also be critical to ensuring your continued success by dedicating resources to shoring up customer service and protecting your current customer base. The cost of finding a new customer often far outweighs the cost of maintaining one. In addition, companies that deliver an excellent customer experience can grow 4 percent to 8 percent faster than their market, according to consulting company 1
2. You’re paying on high-interest debt
High-interest debt may have been your only option in the past, but carrying that cost may start to strain your company financials. Many companies choose to refinance the remainder of a debt at a lower interest rate after establishing credit. Similarly, if you carry significant balances on company credit cards, consider reducing your overhead by taking out a lower-cost term loan or line of credit to pay down those amounts. This can be a smart strategy for businesses that took on expensive loans during the recent economic downturn or while they were establishing credit. This strategy can improve your company’s overall financial health, making you a more appealing prospect for lenders and investors in the future.
3. You’re working inefficiently
Your team needs up-to-date and effective tools to be its most productive, so take a realistic look at whether they’ve got what they need to work smart. The efficiency boost that new technology or equipment delivers can help to offset the cost of your purchases, and new tools can provide a competitive advantage if they increase the quality of your work or speed up production.
Upgrading technology may also make sense if your systems are prone to mechanical or technical problems, resulting in downtime and lost productivity for your business. Time and energy that is lost while you wait for fixes can have a direct, negative impact on your bottom line and team morale. If you need to invest in big equipment, seeking an infusion of capital can help keep company financials liquid while giving your business access to the tools you need.
4. A strategic acquisition is within sight, but out of reach
If a company or product line that complements your offerings is for sale but you don’t have the cash on hand to make the purchase, bringing in additional capital may be a solution. Other strategic expansion purchases may include a building to get out from under the cost of leasing, a piece of machinery or equipment that will increase your output, or a one-time purchase of reduced-price supplies that could lower your cost of goods sold (assuming you won’t find yourself stuck with excess inventory).
5. Your visibility is waning
It takes ongoing effort and money to keep a company in front of prospects and customers. If you’re not investing in marketing your business, your competitors may move into the spotlight instead of you.
If you plan to borrow to support your outreach, first determine the best ways to get customers’ attention, how much you need to spend, and what kind of return you expect on your investment. When considering a direct marketing campaign, for example, calculate how much new business should result. Are your expectations in line with industry norms for response rates? You might decide to increase your use of search engine ads to find customers who need your product or service right now. Or you may opt to hire additional sales staff to help your business take off.
Having a well-thought-out plan for how to use working capital can help to ensure your company’s future growth plans are realized. Think carefully about where financing would be most useful, and you will be better equipped to make the right moves.