If you choose to take on debt to implement growth initiatives, how will you achieve the right balance between that debt and available liquidity? Oak Street Funding answers this frequently asked question.
For businesses that consider or choose to take on debt to implement growth initiatives, achieving the right balance between that debt and available liquidity (available cash or the capability of quickly converting assets to cash) is important. Maximizing a company’s return on equity requires a certain amount of debt. Oak Street appreciates the need for clients’ capital management strategies to align with their long term growth plans while minimizing potential cash flow vulnerabilities and works cooperatively with its clients to achieve these goals. In a survey, we discovered our clients were able to realize an average of 36 percent growth by the investment of borrowed monies into their agencies.1
Many agencies have recurrent thoughts about growth, but due to their day to day demands they often are not able to develop a focused plan. If you are considering borrowing to grow, you should ask yourself the following questions.
How do I want to grow?
Growing a business can mean different things to different companies. Whether businesses choose to grow by expanding products and services, tapping referrals, increasing sales and marketing efforts, hiring or through acquisitions, different levels of investment are required. Begin by understanding how you plan to grow and what kind of investment is needed.
What is my growth timeline?
A young business owner may have decades to grow an organization, while an executive nearing retirement age may need to build value quickly in order to sell a business. For executives with short timelines, growth via acquisitions may be the best strategy. Your goals and timeframes will help determine your timeline.
Are opportunities favorable now?
Timing is always important. For example, during times when a soft market is ending and revenue streams are weak, acquisitions can be
relatively cheap. Business owners should always be ready to take advantage of a favorable opportunity. A line of credit can help you be ready when the time is right. Position your business to move quickly by getting approval before opportunities present themselves.
How do I feel about risk?
Everyone has a different tolerance for risk. Some view debt as a risk, preferring slow and steady growth through utilizing cash versus debt. Others consider organic growth a risk, since the slower pace may result in competitive pressures. Balance these views with your growth plans and timeline to come to an acceptable level of risk.
- Data as of April 30, 2013, for entire portfolio of loans. Average timeframe of 28 months. Individual loan results may vary and revenue growth is not guaranteed. Some loans were used for multiple purposes so percentages may reflect growth rates based on a weighted average achieved in combination with other loan purposes.