What growth-oriented, early-stage business hasn't faced this dilemma: You need money to keep growing, but staying on top of expenses is a challenge, yet you want to keep your debt load low.

The prospect of taking on debt--or deciding how much and when to take it on--is an issue that keeps many entrepreneurs up at night. Priyanka Agarwal,  Director of Digital Marketing at Hiscox, notes that one in five business owners surveyed for the most recent update of the Hiscox American Courage Index have borrowed money to invest in their companies. While they need those funds to pursue growth, they're also concerned about keeping their debt load manageable.

Create a safety net: "There is no one-size-fits-all solution to this common dilemma, but there are strategies that many different types of businesses may find useful," Agarwal says. "For example, if you can get key clients to prepay for products and services, you can use those funds as a safety net, freeing up other funds to support growth-creating activities."

Echoing Agarwal's suggestion, Wright explains that business owners who are able to persuade customers to prepay or even put down deposits should be in a good position to structure incoming cash flow to consistently exceed outflow.

Plan for downturns in businesses insuring yourself with business liability insurance. One in three small businesses are sued and you can be sued even if you haven't made a mistake.

Focus on cash flow: The idea of a safety net is one that many business finance experts endorse, and creating one should start with a strong focus on cash flow, suggests Tiffany C. Wright, founder of The Resourceful CEO and author of The Cash Is Out There! Access the Cash You Need to Impact Your Business (Morgan James Publishing, October 2014). "Your business can operate indefinitely--i.e., for years--if you structure it in such a manner that you have positive operational cash flow, even if you operate at a net loss," she says.

 "Focus on weekly cash flow at least 12 weeks out, and determine major cash needs to support growth or infrastructure--things like hiring employees or necessary capital expenditures--one to three years in advance," Wright advises. "That will help you manage your debt dilemma."

That's solid advice, but many businesses, no matter how well they manage cash flow, will face the inevitable crunch. Shortfalls can be triggered by many unforeseen causes, such as ballooning accounts receivable balances, a rapid uptick in inventory needs, delayed payment from a major customer, or the failure of a critical piece of equipment, to name just a few. So your credit safety net should include access to, well, credit.

Get access to a credit line: "Just as the time to shop for an umbrella is when the sun is shining, the best time to apply for a credit line is when you do not need it," says Edward Kohlhepp, Jr., a Certified Financial Planner. Likewise, it's a good idea to establish a strong relationship with your bank before applying for a business line of credit. Try to consolidate your business accounts at a single bank and get to know a banker there personally. It's usually easy to open a small business credit card account, even if your business doesn't have a significant credit history yet, although you may have to guarantee the account personally.

Focus on demonstrating regular cash flow and debt service (paying your rent, payroll, taxes and other bills on time). When you have done all these things, then you should apply for a credit line. "Banks want to help good businesses," Kohlhepp, Jr. says. "Having a clean set of books helps, too."

Attorney Leslie Tayne, author of Life & Debt (Gateway Bridge Press LLC, January 2015), stresses that it's important to have a solid plan in hand when approaching a bank for a loan or a line of credit. "The banks will want to see if you have done your research in case things go wrong," she warns. Be prepared with a good business plan showing a pattern of growth. Include detailed financial statements, information about your management team and a contingency plan for dealing with unforeseen events.

Kohlhepp, Jr. adds that you must be able to make a specific business case for any borrowed funds, such as the need for a new piece of equipment to boost productivity, or additional staff to support an increase in sales activity. "You'll probably need to explain these needs in detail," he says. "Don't expect the lender to know your business."

One of the most important things banks look for is good small business financing especially cash on hand. Agarwal suggests maintaining a cash balance sufficient to meet all obligations for at least two months. Debt doesn't have to be scary, as long as you have cash flow under control, and a clear line of sight to debt repayment. 

Published on: May 19, 2016