It's Not Enough
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Q: My business has been growing at a rapid rate. We recently applied for and were approved for a line of credit to fund this growth. Almost immediately after the loan closed, we determined that the line was probably not enough to get us by. How soon is too soon to go back to the bank and ask for more money?
A: It's never too soon to talk to your banker about your growth, but asking for money is a little more tricky.
My greatest concern in your case is that your lender didn't pick up on the fact that you might need more working capital in the immediate future, and suggest that you borrow additional funds to cover the probability of future growth. I would advise anyone who is borrowing for their company to add as much working capital as they can justify when making a loan request. It's much more difficult to go back to the well a second time, especially so soon after your loan's closing. Lenders want to see how you handle the funds they have already extended to you before allowing you additional capital.
Too many times I've seen businesses fail because the entrepreneurs didn't want to go into what they perceived as too much debt and so ultimately did both the lenders and themselves a disservice by not borrowing enough working capital to allow their businesses to grow. With your business growing at such a rapid rate, you can probably justify to your lender your need for additional capital, but make sure you have your ducks, or, more appropriately, your dollar signs in a row before approaching them. Have proof of your growth in the form of additional accounts receivable, invoices or any new contract agreements with your customers. Also, your business has obviously changed since closing your loan, so have a new business plan in place if your company has headed in a new direction or update your old one to include the main reasons for your recent growth.
Just make sure the reasons for your new request are sound and can be readily justified. If you can't sell them to yourself, you don't have a prayer of selling them to your lender.
Doug Hood is co-founder of Rainmarker Capital Corp., a capital-acquisition consulting company in Cartersville, Georgia. Co-founder Marilea S. Hood also contributes to this column.