How to choose the right financing for your small business
A big part of managing a business is the finance aspect. Unless you are smooth-sailing from the inception of your businesses towards significant profitability which will finance any requirement you may have down the road, at a certain point in time, often before even you set up shop, you will be required to weigh in the different options to finance your business.
Successful and large businesses vs small businesses
Finding finance for your large and successful business is a lot easier than for a small business.
If you are a publicly-traded monster, you could issue bonds at 2% and have the public finance you for millions or more. If you’re not publicly traded but still a significant business you will have banks standing in line to loan you at under 3%.
If you’re a small grocery store, you may have serious trouble borrowing at lower rates from establishments like banks. The natural partner you will seek at this situation is a lender, whether an online lender or a land-based lender and the interest rate is likely to be significantly higher. The approval process, however, is supposed to be much techier.
The reason online lenders are able onboard clients which banks refuse to borrow money to is two-fold:
- Online lenders have much fewer overheads in lending out money to clients. They don’t undergo the same regulation as do banks, don’t have a massive staff and as many expenses, and they are already taking into consideration that a certain percentage of the borrowers will default (partially, or fully). It’s all been taken into account with the relatively high-interest rate they are offering.
- Online lenders leverage technology to be better than banks in identifying good borrowers among small and micro-businesses and even sole-traders who don’t have all the traditional paperwork to show. They can connect directly to one’s Amazon or Paypal account, analyze the sale patterns, and get to a pretty good understanding of how healthy is the business and how much money they should “risk” lending it.
Hence, lenders are the obvious choice for several types of loans:
- Any business requiring a quick cash injection can use an online lender. The relatively high-interest rate shouldn’t make a difference when borrowing for very short periods of time with a very high level of confidence to repay in time.
- Businesses that are fully healthy but don’t want to go through the ropes of applying for a loan with the bank which includes a business plan and projection often. Some businesses just prefer the comfort of online borrowing, and would rather pay a few more dollars over spending time and energy with archaic establishments.
- Businesses that are simply too small or have a bad credit history to borrow from the banks. They have been rejected and now are looking at different means of financing outside the bank. There are even lenders globally focusing on this type of audience like Cigno, an Australian lender specializing in sub-10,000 loans which asks nothing more than a 90-day bank statement to approve or disapprove loans.
How to plan your financing correctly?
Financing your business with no care or thought may cause your business to end up belly up. Many large businesses have failed on that, including Avaya which failed to pay debts when they have matured (which means when it was time to repay them).
Doing this correctly required three main elements:
- Knowing exactly why you are trying to borrow money and how much before you reach out to any lender or bank. It’s not about borrowing the most you can borrow at that point in time, but rather borrowing just enough to get you by. The less debt you have, the healthier it is for your business, and the less interest rate you will be paying.
- Know exactly when do you plan to repay your loan and compare loans accordingly. For example, an equipment loan is normally a bigger loan for a longer period of time than, for instance, a working capital loan. You have to shop for what you need specifically when you need it and match against comparable results.
- Put loan repayments as a priority, and in case of need, use refinancing. What you don’t do is simply miss out on repayments, because then your loan will incur more and more interest ballooning to be something that may risk your business as a whole.
Which other means of business do you have?
Below, we will list several more ways to help you finance your small business and prevent it from failing:
- Credit cards – often the easiest way, but a way to high-interest rate.
- Equity sales – selling a piece of equity in your business is always a wise idea if you require financing. Especially if the buyer is an angel investor or VC who can help you reshape your business for the best.
- Borrowing from friends, family, and neighbors – try to avoid that ask much as you can. If you fail to repay it goes straight from the business domain to the personal domain and that is not welcomed.
- Personal loans – when push comes to shove, you may end up requiring to put some of your own money or borrow money from your personal account. This usually means the business is unhealthy, and you may want to reconsider whether it’s worth delving into debt in your personal account for it.