The outlook for U.S. businesses is solid, with the CEO Economic Outlook Index still above its historical average of 82.6 at 89.5 in the second quarter of 2019. Most financials we see from companies continue to indicate strong earnings. For some companies, that means it is time to add new capacity, additional staff, a larger facility, or other business investments to poise them to grow.
If growth is in your business’s future, you’ll likely need financial help to make it happen, and your banker is an extraordinary resource. As a trusted financial partner, he or she can help evaluate your financing options and develop a sound, well-structured plan to maximize your growth. Read through these crucial considerations to discuss with your business banker as you develop a business expansion plan and look at financing options.
1. Company Financials
At the initial meeting, come prepared with your company financial statements, as well as information about your personal assets. Together, you can review and forecast the costs associated with expansion and provide projections of what you expect to accomplish with the additional capacity. This information will help your banker evaluate your projected level of cash flow compared to your required debt payments, ensuring there is adequate cash flow to invest into the business while still allowing an appropriate amount for you. This meeting is also your chance to articulate your vision on how you’ll generate new business utilizing the assets you’re planning to put in place.
The bank will also want to understand how the money will be used to grow your business, how much money is required to achieve this growth, and how the money (and interest) will be repaid.
2. Current Debt Structure
As part of the financial analysis, you’ll need to determine how much additional debt your business can reasonably and comfortably assume. A banker can help you approach your current debt structure as a “clean sheet of paper,” meaning they can help determine the best way to refinance existing debt with potentially better terms, thereby improve liquidity and cash flow. This debt restructuring strategy could very well give you immediate access to capital to help fund your expansion. For instance, shifting debt from equipment to real estate could free up collateral to finance the purchase of new equipment or maintain existing machinery.
Given the CEO Economic Outlook Index peaked at 118.6 in the first quarter of 2018 and has dropped each quarter since then, it is essential to structure your debt for expansion in a way that minimizes your risk if the economy softens. Many companies that had a difficult time during the Great Recession, completed an expansion or acquisition late in the economic cycle and had a tight debt structure. When the economy softened severely, there was little room for error, and numerous companies sadly had to close their doors.
3. Realistic Expectations
Transparency is critical in these types of discussions. Be sure to share your long-term objectives as well as insights about your industry, competitors, trends, and markets to help your banker better evaluate your potential for growth provide the best advice on how to structure the debt.
You and your banker should also discuss any obstacles that might stand in your way or put the company in jeopardy, then develop a game plan for how to overcome or avoid them. By taking an honest look at potential setbacks and preparing contingency plans, you can manage and mitigate these risks long-term.
4. Appropriate Financing Options
Based on your needs and financials, your banker will be able to help identify loan options that may be a good fit for you, such as conventional financing (traditional term loans or local loan programs), a short-term line of credit, or a government-backed Small Business Administration (SBA) loan. SBA financing may make sense if you need to stretch out your payments over a more extended period to maintain cash flow. The SBA 504 Loan is often a preferred choice to fund real estate, new equipment or expansion projects (especially given that long-term rates have recently tumbled); while the SBA 7(a) Loan, Cap Lines, or Express program are other options to consider.
Final Notes of Advice
As you continue developing your growth strategy, keep your banker in the loop. He or she will pay close attention to the following areas while considering your business’s growth and funding options:
Your personal creditworthiness — Most banks today look carefully at what’s referred to as global cash flow—or the aggregate of the business’s finances and the owner’s personal finances—when analyzing business loan requests. Therefore, you should strive to build and maintain a healthy personal credit profile and credit score, as well as a strong business credit rating.
Owner’s equity and personal guarantees — Banks generally expect owners to be willing to invest some of their own money into their growth plans. In other words, you should have some of your own “skin in the game.”
It’s easy to get ahead of yourself when contemplating a business expansion. However, involving your banker along the way can help ensure your business is aligned for growth and has the financial plan to support it. Ready to take the next step? Download our Business Loan Application Checklist to prepare for a productive conversation with a banker today.
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