All I Need is Another Loan!!!
May 2025
Richard T. Hendee, Editor
The Silver Fox Advisor
Something I have seen in my years of experience in advising small businesses that is often very disturbing is a business owner who is not able to identify or accept that the business either has a revenue issue or an expense issue (sometimes both) and then seeks to borrow additional money to keep the business going. There comes a point when the cash flow generated from a business operation simply can not cover the debt obligations.
Typically loan payments are made from the profits a business is able to generate. If the business is losing money month after month, then it is not generating the profits needed to pay loan payments. Therefore, adding an additional loan payment is not the answer.
Further, when obtaining a new loan is not possible, many business owners seek to find an equity partner. While this can potentially be a workable solution, raising capital through an equity partner can be a very expensive process. An equity partner is looking for a rate of return that is higher than what can be earned in the open market. Let’s say a five-year Treasury Bill has a rate of return of 5.0%. Treasury Bills are considered a risk-free investment. Investing in a small business has risks associated with it, so an investor wants to be compensated for that risk. Thus, an investor may want to realize a 10.0% or even 15.0% annual rate of return. In addition, most investors want that return to be an after tax return, so if the investor is in a 34% tax bracket, that would mean for the investor to net 15.0%, the annual return rate must be 20.1%. Then, if the investor doesn’t get paid anything back for five years, that 20.1% annual return would need to be multiplied by five. This all results in a $100,000 investment turning into a $200,000 plus repayment after five years.
Instead of obtaining another loan or seeking an investor, what the business owner needs to be focusing on is increasing more profitable sales, cutting the cost of goods sold to improve the gross profit margin and/or reducing operating expenses.
There are also some moves that can be made to reduce the amount of debt on the business’ balance sheet, like selling off old inventory to generate cash, selling some fixed assets for cash that are not longer being utilized, collecting a note receivable that has been outstanding for some time. All these examples plus a few others could be used to generate cash that could be used to pay down or pay off debt, thus reducing the amount of monthly loan payments.
If you need assistance in reviewing and identifying some customer experience factors that you can build on, I recommend you seek a business advisor, consultant or mentor: Contact a Silver Fox Advisor. Remember, having experience on your side always helps. We encourage you to visit our Website at www.silverfox.org to select a Silver Fox Advisor and also to learn more about the Silver Fox Advisors, as well as our great programs and community outreach endeavors.
