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Growth often demands considerable capital, and getting that money may require you to seek a bank loan, a personal loan, a revolving line of credit, trade credit, or some other form of debt financing.
How much debt is too much? The following guidelines may help you determine that.
Debt is a good idea if you need to improve or protect your cash flow, or you need to finance growth or expansion. Common reasons for seeking a loan include need of working capital, expanding into new markets, and improving cash flow.
Before taking out a loan or any other kind of debt, you should spend time planning your capital needs. Avoid taking on new debt during a crisis...even if the loan might help you out of the crisis. Look for another way first, and use debt as a last resort.
A capital plan should consist of a complete review of your balance sheet to help you analyze cash flow, assets and liabilities. You'll also want to construct a pro forma statement, which is a projected balance sheet for the coming 1-3 years.
Make sure you are taking out the right kind of loan. Taking out a short term loan when a longer term loan is required can quickly create financial problems. Use short term loans for short term needs.
When interest rates are low and money is cheap, you may be tempted to take out loans to buy equipment or make other capital purchases. Be sure to base this decision solely on your current needs. Don't just take out the loan because the rates are good. The rates can always increase...unless you can get a locked in rate.
