By Guest Author, Carolette Alcoran:
Small businesses that are in an expansion phase will often need to turn to banks or finance companies for business loans to facilitate their expansion plans. Especially if they don’t have sufficient working capital to cover the additional outlays.
This is a common financial strategy for opening new premises, expanding existing premises or increasing stock inventory. But is it wise to borrow money for more intangible aspects of expansion planning, such as marketing?
Finance companies like Beyond Merchant Capital, who specialize in providing merchant cash advances to retailers in the small business sector, say yes – provided the business has a clear marketing strategy to use the money for promotions that will generate sufficient additional sales to cover the cost of repaying the loan.Are you a #smallbiz considering a business loan for your next marketing campaign? Give this a quick read: Click To Tweet
Banks and more traditional lenders tend to be not so keen to lend money for marketing purposes because the money is not being spent on something tangible that they see can be converted to cash.
However, the more innovative FinTech lenders that are providing a substantial proportion of small business funding in the US, Europe, Australia and South Africa, are most willing to lend for marketing campaigns if the businesses can demonstrate past success that had a measurable return on investment.
Usually, this means the business will have been around for at least a year or two. Newer businesses would have difficulty in demonstrating any sort of track record with marketing campaigns.
And having an experienced marketing manager or consultant that can prepare realistic cash flow and sales forecasts for the campaign will help too.
Minimum requirements for borrowing
For retailers, having a minimum of $10,000 in credit/debit card sales a month is usually the threshold that most financiers will look for before lending money for marketing purposes. This is because merchant cash advances are usually repaid through a deduction from future credit/debit card sales using a point of sale machine that is installed specifically for that purpose.
Therefore, prioritize payment by credit or debit card in a sales promotion that is utilizing the borrowed funds to help ensure the loan is repaid quicker than if the retailer makes cash a preferred method of payment.
Remember that a marketing campaign is only one component of a marketing plan, which should comprise both long and short-term strategies.
Long-term marketing strategies are all about building brand awareness and increasing the business’ target market for its products or services, whilst short-term marketing strategies are focused on increasing sales in the shortest possible time frame.
It is wise to only use business loans for short-term marketing campaigns. Long-term marketing strategies should be financed out of retained earnings.
Sometimes the difference between short and long-term marketing activities can be blurred. Generally speaking, any marketing activity that involves launching, implementation and measuring within a period of six months or less is regarded as short term.
And that raises one of the most important aspects of a short-term marketing campaign financed by borrowed money – the ability to measure results.
Using a business loan for marketing
For long-term marketing strategies, monitoring and measuring results are important too. However, short-term campaigns are vital to ensure that the cash being invested in the campaign is being turned over in a short enough time to meet the repayment obligations of the loan.
Therefore unless the campaign is one that can be specifically monitored for progress and measured for results, it may be wise not to use borrowed money.
Applying for a loan to finance a marketing campaign can be easily done online. Many of the FinTech financiers will make a decision on the application within 1-2 days and can transfer money to the business’ bank account within 24 hours of signing off on a loan.
Asset backing and credit scores are not so important for these types of loans as having the sales turnover and ability to demonstrate how increased sales will result from the application of the loan.
Therefore when applying for a business loan to support marketing activities, a professionally prepared marketing plan with cash flow forecasts will help to ensure the success of the application.