Finding the right financing to grow your business is imperative. Along with access to capital come various other risks that can destroy your company, so it’s important to know how to properly manage business loans and other funding as a business owner. Finding the right financing is key for any growing business. It’s an essential part of expanding your operations and scaling your business as quickly and efficiently as possible.
When you don’t have enough capital for expansion or to purchase new machinery, a loan from a bank can help you get the funding you need from another source. However, managing business loans and other types of funding poses unique challenges than they would if you were operating a different type of company.
With that in mind, this article will cover some tips on how to manage business loans as a business owner effectively and safely, without risking the financial well-being of your company or creating unnecessary financial headaches in the long term.
Know What You Can and Can’t Afford
The first thing you have to know before you start looking for financing is exactly what you can and can’t afford. While it’s tempting to take on every new loan that’s offered to you, you have to be very careful about how much of your company’s cash you put on the line in exchange for a loan. When you apply for a loan, the bank will look at how much cash you have on hand and how much you need to expand in order to grow your business.
They’ll then compare those two figures and calculate how much money a loan of that size will cost you. If the amount they calculate is more than the amount you can afford to pay back, you’re not getting the loan. If you can’t afford a given loan amount, try lowering your expansion goals or cutting back on certain expenses.
Understand The Terms And Conditions Of Your Loan
Once you know what type of financing you’re looking for, you need to understand the terms and conditions of any loan you take out. This includes the loan amount you’ll have to repay, the interest rate you have to pay, the repayment schedule, and penalties. Investing in software for loan servicing can make this process a lot easier.
Be very careful not to sign a loan agreement that includes any of the following clauses in your loan agreement: – Penalties That Increase With Time. Interest rates are the price charged for loaning money. If you have to pay them back, you will end up paying a lot more than you would if you simply had to pay the amount in the first place. Make sure that you only agree to pay a set rate of interest. – Higher Interest Rate With Higher Debt. If a lender agrees to charge you higher rates if you decide to borrow more money, that’s a bad sign.
That indicates that the lender is concerned that you’ll eventually decide to grow too big too fast, so they’re trying to protect themselves. – Higher Rate With Better Credit. Most financing is based on the fact that you have “credit” (i.e. a credit rating from the three major credit bureaus). If a lender insists on making credit a key factor in the agreement, you should walk away.
Stay Flexible With Repayment Schedule
Another thing you need to know about any financing you take out is how flexible you have to be with the repayment schedule for your loan. Because the amount that you owe on a loan is what determines how much you pay in interest, having to pay 15% interest is much more expensive than someone who has to pay only 10%. That’s why it’s often a good idea to keep interest rates low and to make your loan payments on time.
Unfortunately, if you sign a loan agreement that includes penalties for missing payments or that forces you to repay the entire loan in one lump sum, you could end up paying much more than you would if you simply had to pay the amount every month. This is why it’s so important to keep interest rates low, so you have the flexibility to pay back your loan on a schedule that works for you.
Always Carefully Consider The Interest Rate
When you calculate how much you’ll need to borrow and how much you’ll have to pay in interest on a loan, you need to be very careful about how you calculate your interest rate. First and foremost, do not borrow money from a bank at a rate that’s less than the interest you’d earn on a savings account. If you do, you’re not only committing yourself to pay more interest over the life of the loan, but you’re also making it more difficult for you to pay off your loan in a reasonable amount of time. Be careful about how you choose your interest rate as well.
Establish A Stress Test For Loan Repayment
One of the best ways to protect your company and the future of your business is to establish a stress test for loan repayment. A stress test is basically a test of your ability to repay your loan, regardless of the amount you borrow. The idea behind a stress test is to make sure that, even if you lose your job or some other catastrophic event happens, you’ll still be able to pay your loan. You can use this repayment stress test for loan repayment when you apply for a loan from a bank, a credit union, or another type of financial institution.
Politely Resist Unaccredited Investment Requests
While most business owners would love to get as much funding as possible, it’s also important not to be too aggressive in your attempts to find new funding sources. There are a couple of reasons for this. The first is that most types of funding require a substantial amount of time to go through the approval process. By the time your loan application reaches the top of the pile, a lot of other companies have applied for the same funding, too. Some of those other applicants may be better suited to receive the funding than your company is.
Finding the right financing is important for growing your business, but it’s important to remember that there are a lot of risks that come with funding, so you have to be careful about how you manage business loans and funding as a business owner.