January 4, 2016

Access to capital is always a challenge, even for a high-margin, low-overhead business. For a pet retailer who can easily find themselves at the opposite end of both the margin and overhead equations, it is easy to understand why a store owner would stress about having access to the cash that can make payroll, inventory and overhead a drama-free issue.

It is just as understandable that certain types of pet store financing would be seen as a godsend, bringing a sigh of relief that allows you to exhale, de-stress and just run your business–or even grow it.

My purpose here is not to denounce all forms of business debt, although my instinct (based in no small part on personal experience) is to warn against it. Rather, it’s to make sure anyone considering a major financing move has really thought through what happens when you move from seeking financing to servicing it.

Proceed With Caution

Sometimes what holds a business back is needing capital to make a move now but not having it on hand. Some sort of financing can get you over that hump and allow you to do everything you need to do–including generate revenue that will allow you to pay back the debt. That’s how you see it in theory, and sometimes it works that way in practice.

One thing a pet retailer should consider carefully before going down that road is this question: How much of what you need to happen after you’ve got the loan is really just a hope on your part? If you’ve convinced yourself you will attract more customers if only you could pay for the marketing, are you sure the marketing plan you have in mind will be effective? If you think business is slow because the store needs a renovation, are you sure you’ve got the right strategy to turn the spruced up store into more purchases?

Many business owners have found themselves under serious financial pressure, or in bankruptcy, because the thing they were sure would make the difference ended up making little or no difference at all–and they went heavily into debt in order to do it.

What Are the Terms?

Often, lenders will offer terms that sound easy to handle. It’s very popular for businesses to borrow against receivables, the idea being that you’d have the money today if people would only pay their bills, so you’ll borrow the money and then pay the loan back as soon as the payment comes in.

That can be a helpful system, although you need to pay attention to what you give up in interest payments. It can also start a dangerous cycle, especially for a business owner who gets behind on bills or payroll. Selling those invoices and then turning around to get caught up will relieve the pressure today, but you get nothing when the client actually pays because you already borrowed against the payment and spent the money.

Other lenders will offer financing in exchange for a percentage of your future credit card sales. That sounds pretty easy for a retailer to handle because you only pay when you make a sale. But you need to make sure you’re not looking at interest rates that cause your debt to accumulate over time if the credit card sales don’t generate enough revenue to keep up with the interest charges. And in the meantime, every single credit card sale you make is now at a discount. Are you sure you can make a profit under those circumstances?

None of this is to suggest that these are scams. Lenders need to make a profit on the loans they make, or they wouldn’t be in business. There’s nothing wrong with their structuring the loans to make sure they get paid, and there’s nothing wrong with their offering you terms that don’t scare the pants off you.

It’s your responsibility to think through the big picture. Debt service becomes a permanent part of your cost and operational structure for as long as you carry debt. It costs money and it requires your time to manage. Granted, not having enough capital on hand creates problems too, and it may well be that a responsibly secured and skillfully managed financing package presents a far lesser challenge.

Borrowers need to think very carefully, not only about how they could handle the debt load, but also about why they’re in a position of wanting to borrow.

It’s one thing if you need capital to start a store. Every startup needs that, although they don’t all borrow it. But it’s another thing entirely if you need to borrow money because a failing business model has left you hurting for cash. If that’s the case, what you need to do first is analyze what’s going wrong and change directions. I cannot emphasize that strongly enough: a failing business heading for closure is bad, but a failing business heading for closure and saddled with massive debt is much, much worse.

And if you borrow money just to forestall the day when your faulty business strategy will bring about your demise, you will be that guy. You don’t want that.

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