Securing a loan at the optimal time requires careful consideration of your financial readiness, loan terms, and planned use of funds to maximize benefits and minimize risks.
Primary Implication
You should rethink your approach if you’re using a loan as a last-ditch effort to save the company or in response to an impulsive whim. Otherwise, the debt timing “sweet spot” is shortly before you need the money based on when you have everything not included in the debt financing in place to realize your forecasted sales, profits, and cash flow increases.
Overview
For many businesses, there is insufficient Cash Flow from Operations to change the growth curve for the business. An infusion of money is needed, or at best, the business will grow a little bit, but it will never get big results.
Most of the time, businesses without large revenue streams that can be funneled back into the business will likely stagnate as the owner burns out doing what’s always been done. Taking on the right business debt can increase sales and profits that will be used to pay off the loan with the increased cash flow from business growth.
The challenge with debt is that even when your motivations for taking on new debt are well thought out, there is always the chance that you could still time your loan incorrectly, as shown in the following scenarios:
- Too early. If you get the loan before you are ready to use the money, you will burn through unsupported cash. The other risk of moving too early is the risk of incomplete information that leads to errors in your financial projections. Either way, your ability to repay the loan becomes harder than it needs to be.
- Too late. If you get the loan too late, you will likely struggle to set up your new asset, causing unnecessary management and financial strain. Blow the setup of the new asset, and your business will be at increased risk.
- Just right. The goal is to get the loan just ahead of when you plan to use the money, with enough time to put the asset in place so that the proceeds from the new asset are what is repaying the loan.
Judging whether it’s the “right time” to get a loan is complicated and requires a thorough understanding of your current financial position, the type of loan you are likely to qualify for, and what you plan to do with the money.
