Cash or credit? Which is the better fuel for your company's growth?

by Scott Westcott

As with many aspects of running a successful small business, there is no simple answer. Whether cash or credit is used to reinvest in your business will hinge on a several factors that can evolve over time. Here are some key considerations:

Your Cash Flow

The old adage “cash is king" still carries weight when it comes to effectively operating and growing a small business. It's essential to maintain operating cash to fund the daily operations of your business, but cash reserves beyond that can be viewed as capital that can be used to fund growth or reinvestment in the business.

Before even entertaining the question of cash versus credit, you should make sure you have a clear picture of what operating cash you need to comfortably run the business.

Your Strategic Vision

Decisions in the present are often easier to make when viewed with a keen eye toward the future. To that end, developing and frequently updating a strategic business plan that clearly identifies where you aim to take the business—as well as key milestones along the way—will help determine the most effective approach to funding growth. Do you hope to sell your business in the next five years? Or do you want to build a lasting enterprise that will steadily grow and be passed on to your children? What other financial factors—such as funding college education or your ideal retirement horizon—may impact how aggressively you grow?

These can be challenging questions, but ones that can provide valuable insight into how you approach and fund growth. A reputable financial planner, a knowledgeable small business banker, or an experienced business coach may be helpful in performing this assessment.

Your Debt Profile

When assessing how to fund growth, it's essential to calculate how much debt you're already carrying—and your comfort level adding to that debt. If you have sizable debt, additional borrowing could have a negative impact on your credit rating, which is never a good position for a small business. And your ability to secure a loan and get favorable terms will be partly dependent on existing debt as well as other elements of your financial and business profile. If you're carrying a manageable amount of debt and can secure a loan or line of credit at competitive rates, then credit may be the best option. However, if your debt level makes you or your lender uncomfortable, then perhaps establishing the discipline of using cash to methodically fund growth of your business could make the most sense.

Maturity of Your Business

Are you a startup or a seasoned business? Many find themselves in a catch-22. They don't have deep cash reserves for capital investments, but also face challenges securing credit because they lack a track record of profitability for their business. In this instance, the most prudent action may be a hybrid approach in which cash is supplemented by funds available through a modest line of credit, or, in some instances, a credit card with manageable interest rates. This approach creates discipline while also allowing for the flexibility of tapping credit when the opportunity is right.

Meanwhile, more established businesses that have shown profitability and sound management stand a better chance of securing credit at a competitive interest rate. In these instances, business owners need to weigh the value of maintaining higher cash reserves with the cost of borrowing.

Your Risk Appetite

How comfortable are you with operating your business outside of your comfort zone? An honest assessment of that question can help guide your decision-making about how much to invest in growth, and how to best fund that growth. It can also shed light on what type of credit may be the best option for your business at any given time. If you are prepared to make a significant capital investment aimed at paying dividends over time, then more of a traditional business loan or substantial line of credit may be the best path. To fund more measured growth, money from a home equity line of credit could be used to supplement cash. Homeowners with more than 15 percent equity in their home are likely eligible for a home equity loan or line of credit. Banks typically allow existing homeowners to borrow in aggregate between 70 percent and 85 percent of their home value, including the mortgage. The home equity loan will give you a chunk of cash and established monthly payments while the line of credit can be tapped periodically to fund a purchase.

Ultimately, how you finance the growth of your business will come down to a range of factors, and will likely change as your business evolves. Yet by taking a thoughtful and methodical approach, you can improve your opportunity to take the most efficient and cost effective path to growth.

About This Author

Scott Westcott is an experienced writer, content strategist and corporate blogger specializing in business, marketing, HR and consumer trends. Executive speechwriter with internal communications and PR experience.


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PNC is a registered mark of The PNC Financial Services Group, Inc. (“PNC”). This article has been prepared for general information purposes by the author who is solely responsible for its contents. The opinions expressed in these articles are those of the author and do not necessarily reflect the opinions of PNC or any of its affiliates, directors, officers or employees. This article is not intended to provide legal, tax or accounting advice or to suggest that you engage in any specific transaction, including with respect to any securities of PNC, and does not purport to be comprehensive. Under no circumstances should any information contained in the presentation, the webinar or the materials presented be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy or should it be considered legal or tax advice. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc., will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission.  Banking and lending products and services, bank deposit products, and Treasury Management products and services for healthcare providers and payers are provided by PNC Bank, National Association, a wholly owned subsidiary of PNC and Member FDIC. Lending and leasing products and services, including card services and merchant services, as well as certain other banking products and services, may require credit approval.