Does it make more sense for me to use my cash flow...

Does it make more sense for me to use my cash flow to grow my business, or to take out a business loan from a bank?

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There are a number of criteria that you need to evaluate before you make this decision.

First, you need to evaluate if you even have surplus funds that you can reinvest in the business. It’s important to stay cash flow positive, even if this means waiting to pursue a growth strategy for the moment.

Is the time right for growth?

A common mistake that business owners make is investing in their business without working out if the resultant profits cover the investment. This is called over gearing, and it can result in the growth actually causing more harm than good.

Ultimately you want your business to grow, but make sure you are investing in the business at the right time, and in the right way. For example, will opening an office in Durban generate enough additional work and profits to cover your new expenses, or is it a drain on the business?

Choosing to invest

Once you have determined that it is the right time to invest in the growth of your business, you need to choose the right method of investment. For example, you might want to remain completely debt free and invest in the business yourself.

However, if you invest surplus cash flow outside the business, you might earn a higher percentage interest than the interest you pay on a bank loan.

On the other hand, leaving your surplus cash flow in a bank account creates liquidity, which will help you secure a bank loan by demonstrating that your business is financially sound enough to generate surplus cash, and because it is always good business practice to have access to cash.

Know your numbers

Finally, make sure you know exactly how much capital you need before choosing the investment vehicle you would like to use.

You will need to demonstrate a firm grasp of your business, profit margins and sales projections if you hope to secure a loan.

Entrepreneur
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