Financing is one of the pillars of business. Starting a business requires capital, and running it also needs cash flow. So, it’s crucial to be wise in adopting financing tricks to keep it afloat and make your business venture grow.
As an entrepreneur looking to start a new business, you can provide finances independently or seek assistance from reputable lenders. This article focuses on the latter. Entrepreneurs can get financial assistance in two ways: through debt or equity.
Debt financing involves getting a repayable loan, which you’ll pay with interest. In contrast, equity financing requires no refund. However, the financier will get ownership stakes in your business.
It’s always advisable to be careful as you seek financing. You want to avoid bad debt that you can find challenging to repay. But how? Here are the dos and don’ts to help you make an informed decision.
When seeking assistance to finance your business, it’s best to do the following:
- Research Your Options
It’s important to do your research before settling on any financing option. Understanding what you’re trying to get into is crucial to avoiding financial setbacks that can cost you your business.
Aside from debt and equity, other financing options include business credit cards and lines of credit. Business credit cards work the same way as personal credit cards. As an entrepreneur, you can use them for your business’s everyday purchases. It generally comes as a one-month loan.
On the other hand, a line of credit is an amount approved by a lender for a business. The business owner can access it at any time when they need it. There’s more to them than these, so assess your preference between a business credit card vs line of credit. Doing so allows you to choose a financing option that will meet your financial needs without fail.
- Understand The Terms And Conditions
Terms and conditions depict the rules of an agreement. As you get financing, the financier will have terms and conditions under which the agreement will be governed.
These terms touch on the following:
- Repayment period
- Interest rates payable
- Degree of flexibility on the terms
- Guarantors needed
It’s important to understand these terms. The aim is to avoid breaching them and face the consequences, ranging from lawsuits to compensation. Both consequences may eat into your business’s finances.
Be sure to ask for clarification where you don’t understand any. Assuming the meaning can put you in trouble in the future.
- Set A Budget
Budgets play a vital role when it comes to finances and spending. They guide your decision-making and spending, preventing you from running into cash flow problems.
When you decide to seek financing, you have minimal funds. Once you get the funding without a budget, you may misuse it and need more funds. Hence, the importance of working with a budget, as it allows you to measure the amount of loan you can pay.
In addition, a budget will also increase your chances of getting financing. It proves to the lender that you have a plan for the money they’ll lend you. It also shows how you’ll use the money to generate income, through which you’ll pay the loan.
Here’s what not to do regarding financing:
- Do Not Fail To Make A Payment
Most lenders require you to repay a loan in installments over some time. It could be monthly or quarterly.
Failing to make these payments as agreed will do more harm than good. It’ll likely lead to penalties, which add to the amount payable. Ultimately, you’ll pay quite a hefty figure, which might affect your business finances.
Missed payments also negatively affect your credit score. It’s one of the things lenders rely on as they decide on the amount they’ll lend you. A poor score results in low financing; the reverse also applies.
Overall, it’s best to seek financing from a lender whose repayment terms you can manage. One way to ensure this is to scout out several before settling on one. Doing so ensures you get a lender whose loan you can afford and make regular payments.
- Do Not Exaggerate The Numbers
The numbers in reference are your expenses and income. The two play a crucial role in determining your company’s financial position. It also guides you on the amount of money you should borrow.
Underestimating your expenses and overestimating your income will make you get a loan that won’t meet your financial needs. In contrast, the reverse will get you a lot of funding that you don’t need. You’ll likely misuse it, meaning it’ll bring less value to your business than intended.
Therefore, never exaggerate the numbers. It’d help to keep track of your accounting. It involves keeping receipts and tracking your expenditure. With this, you’re less likely to make incorrect financial projections. The result is making accurate and informed financial decisions.
Financing is important to any business, especially when there are financial hiccups. The discussion above details the dos and don’ts of financing. With this insight, you’re better placed to take advantage of financing for your business’s growth. It’s in your best interests to put the insight to practice.