Imagine a small-business owner walks into his or her shop one day and sees water gushing from the company bathroom, turning the entire place into a giant swamp. In this emergency scenario, the business owner doesn’t have much time to think, and doesn’t have enough cash on hand to fix the plumbing that day and open up for business.
If the business owner had a line of credit in place for emergencies such as this, he could easily write a check to the plumber and clean-up crew and pay a low interest-rate on the line of credit to cover the fix. Instead, with no contingency plan, the business owner would likely need to take on a short-term business loan with interest rates in the 60 to 80 percent range to fix the plumbing and get back up and running.
At MultiFunding, a loan brokerage firm, I talk to small-business owners everyday who are in desperate need of a loan to cover an emergency situation. If these business owners would have taken initiative much earlier, when the need wasn't as desperate, they may have had better loan options with lower interest-rates.
As small-business owners, we tend to only concentrate on the here and now: how sales went that day and what’s on the horizon for tomorrow. This shortsightedness can spell trouble when it comes to a dry spell in sales or an unforeseen circumstance in which instant cash is needed.
The truth is it’s easier to secure a loan or a line of credit when you don’t need one rather than wait until the situation is dire.
If your business is doing well – you have accounts receivable, industry growth is strong and you have good credit – now is the time to consider a loan or a line of credit. Save the funds as a contingency plan in case something does go wrong or you experience a slow month and need the extra cash to cover operating expenses and payroll.
For most businesses, there will be plenty of options for loans when business is good and cash flow is strong. However, choices dwindle and can be extremely expensive if you wait to consider loan options until you’re desperate and in need of a lifesaver loan.