Many small business owners wonder: what is business financing? And how can it impact you and your bottom line?
Getting financing for your business can be a great asset that helps you expand. It’s also a great way to acquire funds to upgrade or continue running your business as it is now.
The key to financing your business, though, is to understand what you should look for in a borrower. Financing is an important decision that shouldn’t be rushed.
In this article, we’ll review everything you need to know about it so you can make an informed choice for your company.
What Is Business Financing?
Business financing is the process to raise money for your company. Typically those funds are used to get a new business off the ground, help maintain a current one, or expand an already-existing entity.
There are different forms of business financing to consider. In most cases, the company owner(s) goes to the bank and takes out a loan. This gives them a quick influx of cash that gets paid back over the course of a few years with interest.
In some cases, though, financing your business can get creative. Newer forms of lending like business-to-business financing skip over traditional methods.
If you’re looking for something reliable and proven, business financing through a bank is probably your best bet. (And if you’re in the market, Credova financing is an awesome option!)
Benefits of Business Financing
There are many benefits to small business financing.
Bringing new money into the company makes new things possible no matter what stage your business is at. For example, an influx of cash might finance your entire operation to get it off the ground. Or it could be used to improve current systems to help you become more efficient.
In many cases, business owners choose to take on debt to grow. As the old saying goes, you have to spend money to make money sometimes. Acquiring a large sum all at once allows you to hire new staff, expand operations, or enter into a new market entirely.
Among the other benefits, business financing frees up cash flow, boosts sales through increased marketing efforts, and may even help attract new customers. Companies see your recent growth and are more likely to do business.
Potential Drawbacks of Business Financing
Of course, every decision has potential drawbacks to consider. That is no different for financing a business.
The drawbacks really depend on which stage of your business you’re at.
For new business owners, taking on debt could change the trajectory of your startup. Some lenders have very strict guidelines in place for startup companies to ensure they get their money back. If you’re hoping to be fast and loose with your new enterprise, taking on debt could derail that.
For existing businesses, bank loans appear on the liability side of your balance sheet. If you’re considering selling your business in the next few years, that debt could prove costly when it comes to evaluations.
And in almost all cases, collateral is required. This means that, in the event that you are unable to pay back your loan, the bank or lender can seize your assets. This could mean things in your business or even personal assets.
Rates and Credit
When you take out a loan, you pay the bank back over the course of several years with interest. In all cases, the interest rates a lender can offer matter.
An interest rate of even one percent difference could save your business thousands of dollars over the years. Getting a lower monthly payment could free up cash flow, but might ultimately prove to cost more than it’s worth.
These are decisions you need to consider carefully or talk over with your business partners.
Your credit score also comes into play. If it’s low, you might not be able to get a good interest rate or borrow much money unless someone cosigns it. Be sure to know your score when shopping around for deals.
How To Know if Business Financing Is Right For You
The best way to decide if business financing is right for you is to honestly assess your current position.
First, what would an influx of money do for you that you otherwise couldn’t achieve? Is a business loan a want or a need?
Next, consider other ways you could bring in the money. Instead of taking on debt, might you be able to sell some assets or cut expenses somewhere? Freeing up liabilities might give you the cash flow you need to achieve the goals you’ve set.
If, after looking over your numbers and considering your options, you determine this is the path for you, then you can proceed.
Every business owner would like more cash and has grand plans for their company. But thinking these decisions through with a clear mind and basing your choice on the numbers is always the smart play.
Financing Your Business
Business financing can be an amazing asset for starting, growing, or even maintaining your company. There are many perks to infusing cash into your business. But it doesn’t come without drawbacks as well.
Be sure to consider things like your credit score and the interest rates and the total payback of the loan. Also, consider which assets you might have to list and if you’re comfortable doing so. Finally, make sure taking out a loan for your company is a need, not a want.
Doing this research on the front end will set you up for success down the road. For more business tips, be sure to check out our blog!