3 Post-Approval Mistakes That Can Kill Your Growing Business 

You have popped the champagne, signed on the dotted line, and got the money in your bank account – hooray! Securing a business loan in Toronto is a huge accomplishment. Whether it be through a government backed loan (CSBFP), alternate line of credit or a traditional bank term loan, you now have the financial freedom to grow your business.

However, what traditional lending institutions will rarely tell you is that actually getting the funding is the easy bit. Many businesses fall at the first hurdle. You can think of a business loan in Toronto. 

Injecting large amounts of cash into a growing business can cause underlying issues to come to light, cause more operational issues and cause a cash flow crisis. To help avoid any issues and ensure your capital helps you grow your business, here are 3 mistakes to avoid after approval: 

1. Spend your new bank balance on ‘Vanity Growth’

A sudden influx of 6 figures in your bank balance can be very risky. Suddenly all of your expenses look like smart investments. Many business owners fall victim to vanity growth. This is when they invest money into growing their business without seeing any cash return.

This typically looks like:

• Moving office into a high-end and trendy space in The Entertainment District even though your local traffic does not justify the costs.
• Hiring too many middle management staff to create an awesome corporate structure.
• Spending thousands rebranding and creating awareness campaigns when you have not nailed your local CAC.

The Solution: Ensure that every single dollar you took on as debt has ROI. If you took on debt to buy equipment then the equipment must lower your COGS or increase your production. If you take on working capital, invest into areas that you are confident will convert quickly into cash. For example if you know there is a huge seasonal increase in demand, invest into stock.

2. Not Recalibrating Your Cashflow to Account for Repayments

The most dangerous assumption any business owner can make is that taking on a loan will help solve their cash flow issues. This is not the case. Taking on a loan creates a new strict monthly/weekly cashflow obligation.

Many online alternative lenders and merchant cash advance platforms offer very fast lending, however they come with regular daily / weekly ACH repayments. If the business has high seasonality or long 60-day invoicing periods within your revenue stream, the loan repayments can quickly take up your entire working account before you have even received payment from your clients. Even a regular monthly payment at the bank can cause issues if you have a dip in your revenue in a slow period.

The Solution: Create a new standalone ledger in your rolling 13-week cashflow forecast called your ‘Loan Service Ledger’.

Always keep at least 2 months’ of loan repayments as a buffer in your operating account (the 10% cushion).

If you receive large sums of monthly revenue but your lender is making weekly repayments, you need to set up a repayment automation so that the entire monthly repayment amount is moved from your main account on day one. This will ensure your daily operating costs do not conflict with your debt repayments.

3. Starving Working Capital by Over-Funding Fixed Assets

Growing businesses commonly invest large amounts of capital into big projects. Perhaps you are completely redesigning your physical premises or building a bespoke software system.

The issue is when entrepreneurs use all of their funding to invest in a fixed asset and then have nothing left to overcome any operational issues. If your leasehold improvement works go over budget by 20% (and they almost always will) and you have to stop trading (or reduce your activity) during the build, you will run out of cash just when you need it most.

If you have invested into a new production facility but do not have the working capital left to purchase raw materials, pay your people or market to customers, you will get nowhere. 

The Fix: Ensure any loan proceeds are allocated with an “Operational Runway Reserve”. As a general rule of thumb, you should try to ensure that at least 15-20% of any significant loans for your business are allocated solely to working capital and contingencies. If you are approved for $250,000 of funding for equipment, do not spend the full $250,000 on the machine. Instead, purchase a $200,000 machine and use the remaining $50,000 to pay for installation, training and the loss in productivity during the transition period.

Conclusion – Borrowed Capital Is Fuel

A loan is not a safety net. It is a way of accelerating your business. Inject money into a business with fundamental issues (low margins, poor customer retention) and you are essentially making the mistakes you were already making, just far bigger and more costly. 

With your fresh funds, maintain your strict, frugal approach. You will want to keep your spend purely focused on generating ROI, have accurate budgets to pay back the loan and keep your working capital in check so that your loan is a launchpad as intended. 

FAQs 

Q1: What is the main mistake companies make when they get the loan?

A1: Spend it on “vanity” items that will not generate any additional revenue such as luxury office spaces and over-hiring.

Q2: How much should I put into a cash reserve?

A2: Keep at least 15% up to 20% of the loan as working capital. This will help if you have unexpected issues with projects, seasonal dips or unexpected fees.

Q3: Can a business loan negatively affect my cash flow?

A3: Yes, if you go with online alternative lenders you may be required to set up automatic payments each day or week which can affect your cash flow.

Q4: What if your project goes over budget?

A4: If you do not have an emergency runway, you could run out of cash mid-renovation or mid setup meaning you cannot continue with your business and still have to pay the full monthly repayment. For more details, you can visit Aura Finance.