Spend Smart: Making the Most of Your New Business Loan
Congratulations! You’ve received the good news that many cash-strapped business owners long to hear: You were approved for a business loan.
Whether you’re getting a traditional bank loan or you went through an alternative lender, your newly acquired funds will no doubt help your business achieve goals, make important changes and continue growing. Your mind is probably racing with all the possibilities this money represents, but before the loan hits your bank account, you need to have a well-thought-out plan for what to do with the funds.
“This may be the end of the loan-application process, but it’s the beginning of what hopefully will be a growth-oriented and prosperous future,” said Michael Finkelstein, CEO of online lending platform The Credit Junction. “Judicious deployment of the new funds is critical to ensuring the business optimizes the new capital.”
Business financing experts shared their best tips to help new business-loan recipients properly manage the money they’ve received. [First Small Business Loan? 7 Things to Consider]
What you should do with your loan funds?
Put the money in a separate account. If you’re using your loan funds to cover ongoing operational expenses and purchases, you might want to place the money somewhere other than your primary business checking account.
Essentially pretending the money isn’t there, and only transferring money as you need it, will prevent you from overspending, said Levi King, CEO and co-founder of business credit and financing company Nav (formerly Creditera).
“If you have to transfer money from one account to another — especially if it’s with different banks — you’ll think long and hard before you make that decision,” King said.
Set up automatic loan payments. Late or missed payments on your loan can really hurt your credit score, and make it more difficult for you to borrow money in the future. One way to ensure you stay on top of your loan repayment is by setting up automatic debits. Most lenders have an online banking system that allows you to do this, and as long as you know you’ll have the funds each month to make the payments, it will save you the hassle of manually moving your money around.
“[Auto-debit] helps ensure timely repayment and is one less thing for a small business owner to worry about,” said Mollie Gawronski, head of small business segment strategy for BMO Harris Bank. “In some cases, [banks can] offer better terms for customers who do that.”
Continue cutting costs and planning your budget.
Don’t let that large bank-account balance go to your head: In the long run, continuing to save money, trim your budget and plan for your business’s future, even though you now have the funds to cover your expenses, will ensure you’re prepared for a financial emergency.
“Don’t assume that once you’ve got funding, you are all set,” King said. “Another big opportunity or problem can present itself tomorrow. Always be anticipating future funding needs, and look for opportunities to lower the cost of existing loans by refinancing for example.
Stephen Sheinbaum, founder of financial technology company Bizfi, noted that putting certain expenses like utilities on an equal payment plan, or looking into vendor discounts or early payoff plans can help you better manage your cash flow.
“Whatever savings you generate should go into your reserves,” Sheinbaum said.
Money mistakes to avoid
Spending just because you can. There are probably at least a dozen small expenses your new loan funds could help cover. You have a plan for the bulk of that money, and you may think spending $50 here or $100 there won’t throw off your financial strategy too much. However, those little costs add up, and before you know it, you could find yourself back in the position of being short on cash.
“Create good operational controls and checks and balances for cash monitoring and authority for release of funds,” Finkelstein said. “It is tempting, with an influx of cash, to add fixed costs, but many times this is not optimal.”
King agreed, and noted that any plans to spend the money should be run by someone else first, like your accountant or financial manager.
“It’s so easy to use [your loan] on things that aren’t going to move the needle,” King told Business News Daily. “Only spend when you need it … as slowly as possible, validating [the expense] along the way. A lot of times, projects and needs change.”
Not paying attention to your finances. Sheinbaum said that the biggest money-management mistake he’s seen small businesses make is simply failing to keep an eye on their spending and income.
“It’s somewhat understandable,” he said. “Most entrepreneurs go into business because they have a passion for their product or service, not because they want to spend all day looking at a spreadsheet or an accounting system dashboard.
But unless you pay attention to the money, you won’t be able to get your product or service out in front of the public.”
Business owners should have a designated day each week, month or quarter to check their invoices and review cash-flow projections against actual business volume, Sheinbaum said.
Hiding from your debt. If you’re struggling to make payments, don’t force the lender to send a collections agent after you. King advised being honest and up front about your situation. There may be something your lender can do about it.
“Go to the bank or lender and let them know what’s going on, and then ask for help,” King said.
“Often, they have flexibility. They may be able to restructure or refinance [your loan]. They don’t want bad debt — they just want to get paid.”