Understanding business financing is key to growing your small business. It can help increase your working capital, which you can invest in growth opportunities.
Through the years, business financing has helped many small businesses grow and keep up with the demands of their company.
Today, there are different types of business financing options you can avail of. Knowing what these are can help you achieve your goals faster!
What Is Business Financing?
Business finance can assist you by providing funds to grow your business. You’ll be able to increase your finances to meet your company’s demands.
You can take out funding from an accredited financial institution and use the extra cash to finance vital operations in your business.
Not to mention, it can even be tax deductible in some cases, as it counts as a business expense. Make sure to consult your accountant or financial adviser on how to best leverage business financing for tax benefits.
What Are the Different Business Financing Options?
There’s a growing demand for funding today, especially since many small businesses are being formed. This being the case, the need to have different business financing options is also on the rise.
Bank Loans
Bank loans are one of the most traditional financing schemes small businesses can get. Many banking institutions offer this, with favourable interest rates and loan terms.
Not every lender caters for all small businesses. They each have individual requirements that a business needs to meet. So, make sure you understand what these are and whether your business is ready to apply for a loan with them.
Cash Flow Loans
Cash flow loans are typically easy to apply for since you usually don’t need to offer any collateral as security. This type of loan can be beneficial for small businesses that need immediate cash.
However, remember that cash flow loans typically have a shorter contract. You must be sure you’re ready to pay the loan when the time comes.
Self Financing
As its name suggests, self-financing is all about financing your business using your funds. This could come from your savings, so you don’t have to worry about looking for an investor.
The good thing about this is that you don’t need a part owner working with you! Although this may require more sacrifice, there’s no added pressure from loan repayments.
Investor Financing
Investor finance/equity finance is another financial strategy to increase your equity capital through investors.
Investors would lend you money in exchange for being part owners of your company.
The beauty of equity finance is that you can often access funds immediately.
How to Choose the Best Financing Option for You
Now that you know the different business loan options, your next step is choosing the best one for your needs.
This is a crucial aspect for a small business, especially if they have no previous business or loaning experience.
History With Business
If you already have a good working or personal relationship with your lender or investor, you can re-apply for a loan. You’ll be able to finance your small business immediately!
Making regular payments is a good way to be in good standing with your lender. This assures them that you are a good borrower and not a risk.
At the same time, you can present a business plan of how and where you will use the money, like the equipment you want to purchase.
You can even go so far as to show how to pay back the debt and from what sources of income.
Cost
Borrowed money always comes with something in return. It could take the form of the following:
- Assets as debt security
- Variable rate or a high-interest rate based on the loan amount
- Stringent repayments and fixed rates
- Small credit line
Regardless of what it is, you need to be ready to repay the loan based on the agreed terms.
Potential Risks
A well-established business usually has a longer credit history. This can help lenders to better understand how reliable and responsible a business is when it comes to making loan repayments.
Remember that lenders must assess you and your company, whether you’re a risk or not. Will you be able to settle the loan in the future?
One way to show you’re a good borrower is if you can show financial data of your previous financial transactions. At the same time, having good credit also looks attractive.
Many traditional lenders would ask you to use an asset as security for the loan. Secured loans like this one are typically better suited for businesses that need a larger amount.
Duration of Business Plans
You need to be as comprehensive with your business plans as you apply for invoice finance or equipment finance.
You should be able to present how and where you plan to use the funds and when you’ll be able to pay the loan.
Doing this ensures your lender that you’ll have a steady stream of income to settle your loan. At the same time, lenders can offer terms favourable to you.
Without a plan, you might have difficulty accessing funding from lenders. Or you could face unfavourable interest rates, fees, and repayment schedules.
Frequently Asked Questions
Business financing is a powerful concept for any small business to grow. Here are some frequently asked questions:
Do I Need a Business Plan?
Not all lenders will look for a plan, but you should always have one prepared.
This is a great way to start your loan application and increase your chances of getting a loan.
Presenting a plan puts lenders at ease that you’ve got your business in control. It gives them an idea of how you’ll be able to repay the loan.
What Industries Are Eligible for Business Financing?
Regardless of your industry, you should be able to find a business lending entity that can finance you. If you prepare and present all the necessary documents, you can apply for small business loans from your lender of choice.
Am I Still Eligible for Business Financing If I Have Bankruptcy?
Unfortunately, applying for a loan while being bankrupt is a challenge. A lot of lenders find this to be risky, considering how they might not be paid.
Nonetheless, there may be some institutions that will be willing to lend you money. The requirements may be more stringent, like asking for an asset or equipment as debt collateral.
Conclusion
Business finance is key to understanding how a business grows. It’s an important subject to learn more about how to borrow money responsibly, whether that’s from investors or banks.
Once you’ve received your loan, make sure you stay on top of your repayments at all times.