Developing a new product launch for a business usually takes an infusion of cash. Unfortunately, not every company or founder has the personal capital or friends and family to lend them the money to support a product launch. This is where knowing how where to get these small-business loans and how to use them becomes important. A lot of time can be wasted pursuing capital if it is not done effectively.
Here are a few ways to make the most out of small-business loans.
1. For product development.
This is a very common area to use small-business loans. Many companies apply for capital when they are just starting out or want to expand into a new area. It takes money to hire people or get equipment to develop the product.
Where to get it: To get a small-business loan for buying standard equipment, you can talk to traditional banks or short-term lenders. Many banks may want to lend money for the purchase of equipment because they can easily calculate its depreciated value as an asset over the next five years. Equipment can also be leased from the manufacturer and can be returned to them at the end of the lease or purchased for a low price.
How to use this loan: The best way is to break the development process into small segments so more money is not invested unless the previous stage in successful. In this way, cash is invested for incremental growth.
2. For manufacture or inventory.
After the product is developed, many times it now will be manufactured by the company, or the company needs to purchase stock for inventory.
Where to get it: As discussed, small-business loans are available to buy standard equipment. If raw materials or finished goods inventory need to be purchased and paid in advance, this is harder to obtain for a product launch (unless they can be resold easily). In this case, apply to one of the many online short-term lenders. Rates may be 20 percent to 50 percent and may need to be paid back within one to two years. With the high interest rate, these small-business loans are easier to get if you have been in business for at least a year and have a good personal credit score.
Small-business loans can be used effectively for a product launch if you use the right source for the appropriate stage.
How to use this loan: Only borrow as much inventory that is needed for the initial product launch. Many owners make the mistake of “over buying" to take advantage of deep discounts that can be offered for a higher volume. This may negatively affect how much sales your company needs to generate to pay back the loan.
3. For marketing and sales.
When the company is ready to sell its product, it can use a business loan to hire additional members of the team or outside resources to market and sell it.
Where to get it: Capital for this stage of the product launch may be the riskiest for lenders since the loan is not attached to an asset that can be sold if things fail. Some companies use their accounts receivables to finance this growth. This money may cost up to a rate of 40 percent.
How to use this loan: Factoring of this asset is usually only appropriate when you expect rapid growth from this product launch and cash is needed to fund expansion for the next few months.
4. For distribution.
Now that the customers have purchased the product, it often needs to be distributed to them either through an internal warehouse or by hiring an outside company to stock and ship your inventory.
Where to get it: A short-term line of credit work can be tapped on an as-needed basis. Consider only borrowing for the cost of the infrastructure that required now. Don't set up a huge distribution network because sales may lag months behind, and this investment may be wasted.
How to use this loan: If possible, you should try to set the cost of this part of the product launch on a per-piece sold basis to minimize the up-front investment. This way, the capital needed will match what is actually sold. Therefore, consider getting a loan which is a short-term line of credit that can be drawn when needed where you are not forced to take the loan all at once. If internal staff needs to be hired, then add people on a part-time basis to scale with product sales.
Small-business loans can be used effectively for a product launch if you use the right source for the appropriate stage.
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