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Recognizing the Right Time to Borrow
By Larry Kneip

If you're a business owner who is working harder than ever, but your company isn't growing any faster, that may mean it's time to get some financing.

Most small business owners cringe at the thought of taking on additional debt, but that attitude limits growth potential. The secret is to recognize the tell-tale signs that it's time to borrow money.

My company is one of the most active Small Business Administration lenders in the Northeast. Through years of experience, we've developed guidelines to help small business owners determine when it's appropriate to get financing.

Here are the seven good reasons to take on debt:

1. Buy your building. Because of today's favorable interest rates and depressed property values, purchasing the commercial office building or plant in which your business operates can reduce your overhead and provide tax advantages as well.
2. Refinance long-term debt. If you purchased or made improvements to real estate during the 1980's, your existing mortgage loans probably have maturities of 15 or 20 years. If there is less than 10 years remaining on the term of these loans, you are using a significant amount of your capital each month to pay off the principal. Extending the amortization on your existing real estate debt to 20 or 25 years can free up a lot of cash which you can use to expand your business. Be sure your loan has no prepayment penalty and no balloon.
3. Increase working capital. Borrowing money to expand your work force and/or to increase your inventory builds your productivity and increases your sales potential. It can grow your business now, rather than wait until you have enough money in the bank.
4. Improve market share. You may need to offer more attractive terms to your existing customers, or to attract new customers who may be credit-worthy but are slow payers. Borrowed funds can help you weather the longer collection periods for receivables that may come with this kind of growth.
5. Purchase new equipment. Financing the acquistion of new equipment is wise if it enhances your productivity, reduces your operating costs and/or enables you to expand into new product lines.
6. Take advantage of discounts for early payment. Your suppliers may suffer a 2% discount off your invoices if you pay in full within 10 days instead of the standard 30 days. Borrowing to take advantage of these discounts can save you a lot of money.
7. Establish a relationship with a lender. If your business has never borrowed before, taking out a loan and establishing a good repayment history can give you access to financing in case of a downturn in business, when slow collection of receivables can reduce your cash flow.

Mr. Kneip is vice-president of Business Lenders, and is based in Clifton, New Jersey.

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