Mark Cuban: Only Morons Start a Business on a Loan. Appropriate Use of Working Capital in A Business
Access to affordable working capital can help your business meet its "must do" obligations and more.
Access to affordable working capital and how that impacts cash flow are two equally important but seldom talked about aspects of starting and running a successful business, in any industry.
Securing a capital can go a long way to helping your business' cashflows, allowing you to perform vital functions related to your business. A healthy cashlow position can help you make payroll in down times, sign new big accounts, launch effective marketing campaigns, etc.
Mark Cuban: Only Morons Start a Business on a Loan
With that being said, one question often asked by small business owners and entrepreneurs alike is "What are appropriate uses of working capital?" Now, before we attempt to answer this question, we must also keep in mind that how you spend working capital is greatly impacted by the source of said working capital and the terms under which the financing was obtained.
In business, one can typically secure funding in one of two ways. You can extract cash from investors who exchange their cash for a piece of your business in which case, you issue stock to your new co-owners, or you can secure financing via a credit line / Loan.
In either case, it pays to strategically deploy your new capital in ways that "Make sense". By that I mean, well a rule of thumb is to spend money on activities that grow the business' bottom line: New sales activities, marketing, paying down older, higher interest rate debt, etc.
According to the National Federation of Independent Businesses (NFIB), there are core financial obligations that can be proactively met with borrowed or investment capital. In a favorable interest rate environment, a business owner can borrow cash or seek investment capital to perform duties core to the growth and/or survival of their business.
After launching a few successful ventures, my personal business experience has taught me to only seek borrowed capital for business ventures that actually make money. Ones with real paying customers and some kind of profit margins.
In this case, you can then spend your new found capital on the activities that directly relate to bringing in new "Paying" customers. When it comes to investment capital, here things can be a bit more flexible because you may have a great idea with some serious potential, and would want to attract some deep-pocketed friends and family who might want to explore the possibilities of your idea with you.
These "Investors" will not require monthly loan payments and will be well aware of the risk of the idea not working out and beyond.
If you happen to have a thriving business, or a new firm with a healthy number of paying customers, and have managed to iron out most of the kinks in your business, then it might help you get to the proverbial next level in your company's growth story by securing a bit of capital.
Capital that can safely be used to secure new inventory, marketing, meeting payroll obligations, hiring new employees to meet increased demand and paying off higher interest rate long-term debt.