If your business plan includes the need to borrow money constantly, it is probably not a good one. For example, sales are increasing 30 percent per year. Your accountant informs you that you’ve produced nice profits for several years, but you never have any money in the bank. In order to fund your growth, you’re in constant need of borrowed funds.
Initially, your bank provided you an operating line of credit that helped you grow. Now that line of credit is maxed out and you still need more. You’ve tapped your IRA, friends, family, and anyone else who can loan the business money — after all, look at the nice profit you’re producing.
This cycle can’t go on forever. Eventually, sources of new funds will dry up or your bank will want out of the line of credit. Then what? The most likely cause of this issue is insufficient margin — a business model issue.
Imagine your product had a 95-percent profit margin. Would you constantly need to borrow funds? The answer is no. The margin generated by sales would eliminate the need for debt. If you constantly need to borrow funds, the capital needed to grow the business and the margin generated by marginal sales isn’t in balance. You need to fine-tune the business model to squeeze out a little more margin.
You have a good business model. Sales are growing, but the excessive appetite for debt will eventually damage the business. You really have only two choices, slow growth or increase margins.