If you’re an entrepreneur, you’ve most likely heard the saying “It takes money to make money.” And, if you continue to be an entrepreneur, you’ll hear it again and again. Why? Because there is some truth to it.
Now, that being said, having money to invest in your business is a great thing, but not always a necessity. So if you don’t have the cash readily on hand, you need to think twice before accepting outside financing.
How can you tell if taking on a loan is a wise decision? Think growth. If you can confidently say that this investment will grow your business (and allow you to make the profits to pay it back), then it could very well be a wise decision. A more literal way of making this decision is with a traditional cost-benefit analysis. Before moving forward with any loan, verify the benefit outweighs the cost.
Here are 3 examples of investments that can fuel business growth:
Is there new equipment you could purchase that would enable you to add more services to your business or perhaps increase your rate of production?
Investing in equipment can often be a very tactical way to see how the benefit can outweigh the cost.
For example, if you own a salon and are currently doing facials, could you add more laser-based services to your offerings? They’re incredibly popular right now and are something you can charge more for. You can take out a loan to cover the initial cost of this expensive equipment, but you can also easily do the math to see if your profit increase will be enough to cover the cost.
Or, perhaps you are in the manufacturing business, and you know that if you upgrade to new machinery you can produce your inventory at a faster rate, giving you more product to sell. If your supply is currently lower than your demand, this could be a smart decision. You can up your production with the new machine, take out a loan to cover the cost, and, again, crunch numbers to ensure the increase in sales will be greater than the cost of the loan.
When you think of growth, you most likely think of marketing. After all, the sole reason you market your business in the first place is...to grow it! But, let’s think about marketing in terms of capital investment.
Perhaps you haven’t been able to reach as large of a market as you’d like due to a constrained budget. It might be okay to take out a loan to help increase your marketing reach.
A great way to approach this decision is to first establish a plan of how you’d like to acquire new customers. How much has it cost you in the past to acquire a customer? Do you have any channels that perform for you consistently?
If you have a channel that steadily delivers customers (and has for some time), look at how much you are spending on this channel. Try to get an idea of how much you are spending per customer you are acquiring.
Now, consider the loan amount you want. If you invested this total loan amount into this channel, how many customers would you acquire? How much revenue would you receive from these customers?
Obviously, if the benefit (revenue) is greater than the cost, taking out a loan to increase your marketing reach could be a great growth strategy.
This is a very literal way to see the benefit of taking on debt to help with marketing. Many businesses take on the debt to try new marketing ideas and more. Perhaps those will work, but they’re not as definitive.
If you’re unsure if your reason for taking out a loan can be justified, consult with your accountant or bookkeeper. They’ll help you calculate numbers for your potential growth strategies.
Do you have a business model that works? Perhaps a restaurant that is booming, a gym that is growing or a salon that is so popular you’re always overbooked?
When you’ve found this sort of success (especially with a model that could be easily replicated), you might consider a small business loan to help expand to a new location. Although it is by no means a guaranteed success, if you can really harness what has made your current location prosperous and do your best to recreate it, then you’re headed in the right direction.
But, before moving forward, be certain that the potential profits of the new location (using conservative projections) will be greater than the cost of the loan.
If you are generating enough money to invest back into your business, that’s great. But there may come a time that you need to fuel growth by taking on a form of outside financing. If you think this might be what you need to take your business to the next level, do the math. Clarify that this investment can, in fact, take you where you want to go and bring in enough profit to pay back the debt.
If you’d like to join a more in-depth discussion on how you can fine-tune your finances to accelerate growth, join us for a free webinar Thursday, November 6th, where you’ll have the opportunity to hear some of today’s top small business CEOs reveal their financial management secrets and even ask them some questions of your own. Sign up here (if you can’t make it live, sign up to receive the recording).