(Illustration by Nicholas Little)
Q: Given today’s low interest rates, should I max out my business’s bank loan to bolster my cash flow?
“It’s true, you don’t pay much service for debt if you do a short-term draw while the interest rate is low,” says Jeffrey Sherman, a speaker on corporate finance, the author of Cash Management Toolkit for Small & Medium Businesses and the chief financial officer at Toronto-based Atrium Mortgage Investment Corp.
“But eventually you’ll have to pay it back, and interest rates could be up again. That is a risk, but the real problem is if you draw up all your bank loan, you’d have no extra borrowing capacity in case of an emergency. This idea of resilience is very important, because you want to be prepared for bad things to happen.
“An example: After the recession of 2008, numerous Canadian companies with strong and viable businesses suddenly found the banks were pulling back their loans because [the banks had] made strategic decisions to cut back in certain industries to avoid exposure. If these companies didn’t have a source of emergency capital, many got in serious trouble.
“Many businesses borrow as much as the bank will let them, which isn’t necessarily the right approach. The right way is to look at your balance sheets strategically, and—perhaps with the help of an adviser—determine how much capital you should have.”
MORE ABOUT SMALL BUSINESS:
- What to do when your company’s growth stalls
- Five sources of financing every small business needs to know
- Why Canadian companies need access to higher-risk financing
- For craft beer–makers Collective Arts, two heads proved better than one
- How direct sales companies reach customers, no store required
- Why the future of global trade deals could be small businesses
- Business New Year’s Resolutions: Focus on small data, not big data
- Four ways to make tax time less painful for small business
