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Building your business up when the economy is down
Entrepreneurs are often more confident about borrowing and investing in business growth during a roaring economy. However, business growth opportunities can present themselves, even during a weak economic cycle.
Entrepreneurs are often more confident about borrowing and investing in business growth during a roaring economy. However, business growth opportunities can present themselves, even during a weak economic cycle.
Your business cycle may be more important than the economic cycle
Your business cycle may be more important than the economic cycle. With a GDP growth rate of 1.5 per cent forecast for 2016, the Canadian economy is in a slow-growth phase and perhaps some businesses aren’t thinking about growth. But your business is either growing, stagnating, or atrophying, gaining or losing market share, regardless of what the economic cycle is doing. If customers recognize the value of a product or service you offer, a small business can grow, even in a slow economy.
I recall Apple Inc.’s decision to launch the iPod in October 2001 in the middle of a recession; It was the right product for the right time because customers saw the value in it.
Business growth can take a number of forms
Business growth can take a number of forms, from increasing sales to increasing market share, improving productivity, lowering operational costs, or launching a new product or service.
Typically, businesses borrow to make money. They’re leveraging borrowed capital to make a profit. Loans can finance anything from ordering inventory to buying equipment to quickly hiring short-term staff to take advantage of a business opportunity.
A recent U.S. survey conducted by the Electronic Transactions Association (ETA) seems to validate that premise: among small business respondents, 54 per cent sought business loans to make equipment purchases, while 51 per cent purchased additional inventory.
Although some financial pundits recommend that businesses borrow as much as they can on the grounds that they may not see another borrowing opportunity, I throw cold water on that concept.
Money doesn’t solve all problems. Ask yourself why you’re borrowing. Targeting return on investment or increasing the value of your business are both good reasons to borrow. We often see clients such as restaurants borrowing for growth purposes that might include opening a second location or expanding their menu offerings.
Canadian businesses can apply for loans from a wide range of sources, including traditional banks and alternative lenders, so choosing the right type of loan can be challenging. Identifying the purpose of the loan makes that choice easier by aligning the terms offered by lenders with the reason for borrowing.
Comparing small business loans is important. The interest rate or APR [the annual percentage rate, including fees] are both common ways to compare loans, especially in the consumer lending context, but a small business should also consider the loan term and dollar cost to ensure a financing solution is the best fit for a particular need or use-case.
Lenders like OnDeck offer shorter-term loans that match the payback period more closely with some loan purposes, thereby helping to lower overall borrowing costs. For example, a shoe retailer specializing in seasonal footwear might be inclined to boost quick-turnaround inventory by taking on a short-term loan at a higher APR than a longer-term, lower APR loan with a higher total dollar cost. The ETA survey reveals that 57 per cent of small business respondents would do just that when faced with a short-term investment opportunity, choosing a six-month loan at a higher APR over a nine-month loan with a lower APR to minimize total fees and expenses. Of course, the small business should also note that the shorter-term loan will have larger periodic payments.
Depending on the purpose of the loan, a quick answer to a loan application can also be very important.
At OnDeck, we work very hard to get an answer within an hour. If approved, you can have the funds in your business bank account, often within 24 to 48 hours.
Sometimes a quick “no” is just as important as a “yes.” Being turned down for a loan provides entrepreneurs with valuable business intelligence, and could improve the odds of success down the road.
Ask the lender why you were turned down. It may help you confront a problem in your business that you weren’t yet aware of and help prepare you for the next phase of growth.