How to use debt to grow your business
Starting or expanding a business is both exhilarating and challenging. There’s the thrill of making a dream come true or watching it grow, tempered with the questions around how to finance this vision.
Patrick Khouzam, managing director with MNP Corporate Finance, explains that teaming up with a financial institution allows for food and beverage processors to invest in growth at a cost-effective rate.
“If a company did not have access to external debt capabilities, then the owners would have to wait for the company to be in a position to self-finance its growth strategy, which takes a lot longer and, as an owner, is a lot riskier,” Khouzam says.
Benefits to financial partnerships
Genni Hibbert, a Relationship Manager with FCC, says borrowing from a financial institution helps build credit and creates future business operating options like credit lines. Plus, working with a lending representative who knows the industry can bring unexpected benefits that may have nothing to do with the loan.
“Getting the loan can create a great relationship,” she says, noting lenders may be able to help connect you with suppliers, IT contractors, lawyers and others you need on your team, as well as mentorship opportunities and business training.
Debt to grow
Debt can often feel like a negative to small business owners because we’re conditioned to consider all debt as bad. However, if the debt creates value and opportunity for the business to grow, it’s a huge plus towards achieving the business dream.
If debt creates value and opportunity for business to grow, it’s huge towards achieving the business dream.
Hibbert says food and beverage processors should do a comprehensive business review and evaluate current needs to determine the next steps of growth and the financial needs to take those steps.
Borrowing from financial institutions, as opposed to friends, family or angel investors, can sometimes work out better for business owners since a financial institution isn’t going to demand a say in business operations like other lenders might do. Once the debt is paid off, there is no further obligation.
Khouzam explains that as a business grows and profitability increases, financial advisors can look at the processor’s debt levels and may consider revising their earlier financial plans.
“Debt should be structured as a business is growing and expanding,” Khouzam says.
He adds that as the business increases profitability, it correspondingly increases its safe leverage – levels that are on the edge of being high-risk but aren’t financially irresponsible. Khouzam says it’s best to continue increasing the risk level as the business grows.
Before you borrow
Before you borrow, lenders will need key information from you and your business, to get a sense that you know what you’re doing and are a safe risk to take with their money. Hibbert recommends having these elements of your business on hand when borrowing money for your food and processing business:
- Business plan: You need an updated business plan to identify goals and needs. Once in front of a lender, these details will help with working through the lending process.
- Cash flow and projections: “The first thing we look at is cash flow,” Hibbert says. “We want to see a business plan that includes projections.”
Projections are achieved by reviewing your highs and lows throughout the year and then projecting those out to one year and three years. They show growth potential as well as indicate gaps in cash flow. Looking at this helps a lender understand the business better, so they can ask the right questions.
- Your goal: No lender will provide a loan without understanding what it’s funding. Your intent may be for business growth, but it must be more specific. Is the money going to pay for new product research? Marketing? Equipment? A new space?
Lenders often provide interest-only periods that provide funds when needed but don’t expect capital repayments until growth results have materialized.
- Openness: Communication with a lender is key. There’s no need to be fearful of explaining current situations. With discussion, solutions can be found to provide lending and ensure it’s the right fit.
Article by: Ronda Payne