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Small Business Loans - How Big Should Your Small Business Loan Be?

Aug 18, 2007
As big as I can get, would be the answer from most small businesses and entrepreneurs. But applying for not enough credit for your small business loan, or getting too much of a small business loan, can have serious negative consequences.

Not having enough available credit can cause problems ranging from losing a substantial sale because you don't have the cash handy to buy the necessary materials to fill the order to having to shut down the company because you can't make payroll. The remedy to the problem is to apply for additional credit and some credit sources will interpret that as inept management. They may ask themselves why you weren't able to correctly forecast your needs in the first place. Or even worse, that you aren't fiscally responsible.

Getting more of a small business loan than you need may seem like a good idea but it can lead to a cavalier attitude toward expense control. "If you've got it, spent it" is not a suitable motto for any company. And credit costs money, if you use credit to pay for expenses that you have adequate cash for, you incur unnecessary interest expenses.

So how do you know what level of small business loan is just right for your business? That's what cash flow projections are for. Every business owner should sit down once a month and project their cash requirements for the next six months. For example: You may know that the summer months are your busiest months. Sales will double for the months of June, July, and August. But since you offer 60 day payment terms to your customers, you won't see that cash starting to come in until August. And you've had to fund, somehow, the sales for June and July.

That's where a small business loan comes in. You can use a revolving credit line to pay for your needed inventory in June and July and start paying the credit line back down in August, September and October. The trick is you can't start looking around for a credit source in July. If you've done your cash flow projections you'll know what your requirements are in enough time to find the credit source you need, at the terms right for your business.

Credit, of course, can be used for emergencies such as repairing broken equipment. Or to pay a one time yearly expense and then spread the credit payments over the entire year.

It can also be used to help a company grow.

Introducing a new product almost always take longer than anticipated. Reaching a new target market requires patience, time and money. There can be delays in regulatory approvals, getting a patent, acquiring licenses. Moving to a new facility may mean additional unbudgeted expenses.

A small business loan, used carefully, can help solve these situations and others. It can be a cushion against the unknown and a good financial management tool.
About the Author
Do you need a small business loan, credit card, or grant? Want to know about other ways to finance your business? Find out more at 58 Ways to Find Money for Your Business Dee Power has written several nonfiction books including Business Plan Basics
Reach her through The Capital Connection
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