The Do’s And Don’ts Of Financing Your Small Business

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The growth of any small business may greatly depend on financing, among other things, but financing a business is no piece of cake. You may have brilliant ideas and work ethic, but your small business may fail to take off or develop without proper financing.

Although there are many different ways of accessing finance, getting it at the right time and with the best conditions might be difficult.

There are many misconceptions out there about financing options, but you could begin by doing research on the internet. By doing so, you’re likely to get a great post to read, which could demystify some of them.

If, like most entrepreneurs, you’re struggling with financing your business, here’re some do’s and don’ts that could help reduce your stress.

What To Do For Financing Your Small Business

The Do’s And Don’ts Of Financing Your Small Business

To ensure you get the much-needed finance on time and under the right terms and conditions, there are a few important things you may need to consider. Here are some of them.

1. Know The Right Time To Borrow

Strategic planning is one of the backbones of any business. So just as with other business actions, you have to seek financing at the right time.

The right time to borrow is after you’ve fully understood your business operations as well as the business climate. Understanding the business would help you figure out exactly how much you need.

If you borrow too early, you could end up misusing the funds, which would still need to be repaid. On the other hand, borrowing too late could lead to an overburdening of your business cash flows.

2. Take What You Need

There would always be the temptation to borrow more than you need. As much as possible, resist it. Just because you can doesn’t mean you should borrow.

Try to do a thorough inspection of your financials, including your assets, revenue, projections, and liabilities. Ensure you do this before you come up with the figure you need.

Also, have a detailed outline of how the funds would be spent. If you borrow more than you require, you could put a strain on the business when the time comes to return unto Caesar what’s Caesar’s.

Borrowing too little could also be like taking one step forward and then two steps backward. You could end up in debt but with no significant improvements to the business operations.

3. Understand The Terms And Conditions

Loans often come with terms and conditions. And these may include the following:

  • Loan term, which refers to the time it’d take to repay the loan, which could be short term or long term
  • The amount you could get, which is typically based on your assets
  • Interest rates of the loan
  • Flexibility of the terms
  • Guarantees or guarantors required

Because every loan is different, it’d be in your best interest to understand what you’d be getting your business into when seeking funding. Therefore, it’s most important to always check the terms of a loan before taking it.

4. Keep Your Books In Order

The hustle and bustle of daily business may relegate your bookkeeping to the bottom of your priority list. But it’s important not to overlook the importance of proper accounting records.

These would help you understand how your business is doing. And with that understanding, you could easily come up with a pitch that could get any financier on board.

5. Do Your Homework

Before you visit the bank or a financier, make sure you adequately prepare. Have your figures and paperwork handy and at the tip of your hands.

If you stutter and stumble during the discussion, you may lose out on an opportunity to finance your business.

6. Know Your Options

Remember, there are many types of financing options for your business. These include bank loans, business credit cards, invoice finance, asset finance, trade finance, lines of credit, crowdfunding, venture capital, angel investments, and so forth. Try to research each of them and select the one that works best for your business.

What Not To Do For Financing Your Small Business

What Not To Do For Financing Your Small Business

While knowing the do’s when getting a loan is vital, it’s equally crucial to learn about the don’ts when financing your small business to know what practices are best to avoid. Here are some of the important ones.

7. Don’t Repay Too Early

Even if you do get the money earlier than the repayment term, it may not always be a good idea to repay too early. Repaying a loan is a great thing, but doing so too quickly could adversely affect your liquidity. If you can still make use of the funds, why not use them to grow your business? Just be disciplined enough not to lose them.

Try to go through your statements and see if your gains on repaying the loan early would outweigh your return on investment. If not, you may be better off investing the money in other ways before you return it.

8. Don’t Miss A Payment

If you miss a loan repayment, it could incur additional fees and penalties, which would be detrimental to your finances. This may seem like a small cost to bear, but an accumulation of such extra charges could add up to a significant amount.

Defaulting on a loan repayment could also negatively affect your credit score. With an unimpressive credit score, it may become difficult for you to access the best financial help. Because most companies conduct credit checks on companies they deal with, it could also hinder the success of your company’s future business dealings.

9. Don’t Fail To Repay

If you fail to repay a business loan, the financier may take legal action against you. Such action can be a drag, and this could cost you a lot of expenses.

The damage that would be caused to your company could be detrimental and, in worst cases, involve filing for bankruptcy.

Meeting your financial obligations would ensure you get a good credit rating and have better access to financial solutions. Keeping your options open and available would come in handy one day.

10. Don’t Forget To Consider Tax

When a business gets some financing, the loan is typically not considered as taxable income. But when repayments are made, you may not deduct tax from the principal loan payments. It’s important, therefore, to consider the various tax-related issues before taking a business loan. 

Takeaways

Financing a small business may seem as easy as drawing money from an automated teller machine, but there’s more to it. You have to know your business environment, financials, and projections.

It’s also about being able to do your homework so you get the best deal possible. When all’s said and done, you’d have to practice discipline and stick to the term and conditions of your business loan.

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