Things To Consider Before Seeking Small Business Financing
Being a small business owner is not an easy job. So, why do so many people go that path? Often because they believe in what they do and seek independence. But how do you make it work in today’s economy?
A successful business is often measured by its stability and not necessarily by profitability. A good business owner will know how to use different products and services to benefit the business and grow or solve issues to keep it alive. This includes identifying the right financing solution.
The “Small Business Credit Survey,” conducted in 2017 by the Federal Reserve Banks of New York, Cleveland, and Richmond, surveyed 5,547 single-employee firms and found that “65% of credit card holders use a personal credit card for business financing,” while only one in four applied for financing specifically for their small business.
Financing options for small businesses include standard bank loans, but many banks are reluctant to fund small businesses without personal guarantees, which require you to risk your personal assets, both financial or physical, to secure such funding. Alternatively, there are companies that offer unsecured loans — also referred to as merchant cash advance or royalty investments. Having worked with several of those products, including in my current role as director of marketing for Yalber, I have learned that, for the most part, these products are similar to one another.
While small businesses may choose different types of financing solutions for different reasons, there are several considerations every small business leader should make before signing that contract.
A small business leader should account for the amount and length of the financing offer needed. To allow a better cash flow and turnaround on credit lines for the business, it is usually best to acquire a short-term financing deal that you can afford. This means that the amount you pay back is fixed for the term, and you don’t risk your business stability if required to pay back a percentage of your revenue. A long-term loan will be cheaper for the business but will limit the funds you can withdraw as working capital, as it will take longer to pay the loan back. The free early payoff and no commitment (typically) for the short-term loan can be attractive to small business owners.
When it comes to credibility with a bank loan, you are good as long as you pay on time. With short-term loans, you can gain points for paying them off early, paying more than your required payment or even for paying on time with no issues. Those factors can help you when you need additional funding before the first loan is paid off. Think about a short-term loan as a credit card. You get a $5,000 credit line, and when you pay most of it for a few months, you get a credit increase. It works the same with short-term loan companies.
Another aspect to consider is how responsive you need your financing contact to be. With short-term financing companies, you can get an actual person as your main point of contact, compared to larger companies and banks, with which you will most likely work with the general customer service department.
Ultimately, you need to remember one thing: Business financing is not the solution for any business. If your business is new and cash flow is not stable, a short-term financing deal will not be the right move, as you may not be able to guarantee the scheduled payment. Or if your business requires a larger financing deal (over $500,000), you will likely want to secure a bank loan due to the lower interest and better payment terms. If your business can’t guarantee the loan payment, however, you should avoid short-term and bank loans altogether.
Planning ahead is the most important part of every business. When you take the time to thoroughly consider your options, you can work to create a stable business. Just remember to shop around and get the best offer for your business. Knowledge is power, and knowing the right tools, services and products for your business’s success is key.
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You can see the original Forbes article here
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