Many small business owners fall into the trap of waiting until they urgently need funds to seek financing. This approach can lead to unfavorable terms or even denial of loans. Let’s explore why securing financing when you don’t need it is a savvy business strategy.
Avoid Last-Minute Financing Pitfalls
Businesses often wait until they face challenges such as losing a major client, experiencing a revenue decline, or encountering economic impacts before seeking financing. This reactive approach makes it difficult to qualify for loans because lenders view these situations as high-risk. When a broader economic concern, like a recession, looms, lenders become more restrictive, favoring only the strongest businesses. Waiting until the last minute can also lead to expensive financing options if a timely business opportunity arises that necessitates quick funding.
Secure the Best Terms When Times Are Good
Proactively securing financing when your business is thriving ensures that you qualify for the best possible terms. With a strong revenue stream, you’ll find more loan options available, and lenders willing to compete for your business. An abundant economy increases the variety of financing products, giving your business the leverage to choose the most favorable terms.
Benefit from a Reserve or Emergency Credit Line
Establishing a credit line when your business is stable provides a strategic advantage. Credit lines typically cost nothing to maintain until funds are withdrawn, offering a flexible financing solution. With terms extending up to three years or more, your business can stand ready to capitalize on opportunities without incurring immediate expenses. Imagine securing a discount on inventory, equipment, or property because you’re prepared with a ready-to-use credit line.
Leverage Favorable Terms in a Declining Economy
Opening a credit line when the economy is strong ensures access to favorable rates that may not be available during economic downturns. During such times, cheaper money allows your business to seize discounts on distressed inventory, equipment, or real estate—opportunities that become increasingly available.
Avoid Unnecessary Costs with Strategic Financing
While securing financing in advance is wise, it’s important to avoid borrowing large sums of working capital when your business doesn’t truly need it. From the moment you receive a lump sum loan, interest begins accruing, which can quickly erode any financial benefits if the capital sits idle in your bank account. Unless you can invest these funds to achieve a higher rate of return than the interest you pay, you might find yourself depleting your proceeds to cover unnecessary interest costs. This is why having a line of credit is an ideal solution. It offers immediate access to funds without incurring costs until you actually utilize the credit, making it a cost-effective and flexible option for meeting your business’s financial needs as they arise.
A Strategic Move for Business Longevity
Ultimately, businesses should act swiftly to open a reserve or emergency line of credit, ensuring financial resilience regardless of economic conditions. Waiting puts your business at risk, as obtaining financing in difficult times could be challenging, if not impossible. The long-term success and survival of your business could very well hinge on having accessible financing when you need it most.
In summary, securing financing during prosperous times is a strategic, forward-thinking move that can safeguard your business against unforeseen challenges, enabling it to thrive even in adverse conditions.