A Retailer’s Guide to Savvy Borrowing    

Sales up. Sales down.  Retailers of all sizes are forever battling to maintain a steady and positive cash flow. As you probably already know, short-term bank loans can smooth out tricky highs and lows in your annual revenue, making it easier to manage your business efficiently.

But far too many retailers ignore the basic rule of business financing: never borrow short-term money for long-term needs. Too often, retailers borrow money on six-month notes, then spend the money on facilities and equipment. Consequently, when the notes are due, they don’t have the cash to pay them.

The Golden Rule
Always match the terms of your loans with the ability of the borrowed money assets to generate cash.

In other words, use a short-term loan (one due in less than 12 months) to finance current assets such as inventory or accounts receivable. Expect to convert these assets back into cash relatively soon; then use the cash flow to repay the loan.

Likewise, use long-term loans (due in 12 months or more) to finance the capital improvements that will eventually generate new profits to use in repaying the loan. By matching your loan’s terms to its assets, you can avoid potentially fatal cash shortages.

©Copyright 1999-2012.  The Retail Owners Institute®.  All rights reserved.