The biggest problem with borrowing money for your business lies in knowing how much is enough. You need the money that will help you increase the profit of your business so that this increase pays off the loan in its entirety (and still generate some profit). You also need to learn when you need to lend this money, seeing as how borrowing too late can be quite troublesome. At the end of the day, borrowing money in order to save your cash flow is also incredibly important. Overall, here’s what you need to know when you decide to borrow money for your business.
1. Borrowing enough money
Some entrepreneurs borrow too little in order to reduce the interest paid. The problem is that being just short means that:
· You won’t be able to fulfill the purpose of the loan
· You will spend (waste) this money on something else
· You’ll end up having to get another/additional loan
So, making an estimate of how much money you will actually need and even borrowing a bit more in order to stay on the safe side is incredibly important. For this to work, you need a financial expert to make a cash flow projection and see just how much you need and just how much you can afford to borrow.
2. Borrowing in time
A cash flow projection is also important because it can show you exactly when you’re supposed to borrow money. Some people believe that they need to borrow when they already experience a cash flow problem. By this point, it’s already too late.
You see, resource management relies on your ability to push all your resources to the limit. Having too much of anything is not a good thing because it means that you don’t use your company’s full potential. For instance, having one-third of your workforce idle means that you could take on more work. Having more work than you can handle means that you aren’t taking full advantage of your market. Having too much cash means that you’re not burning through it effectively.
So, try to predict these bottlenecks and take preemptive measures in order to keep everything balanced. Treat your money-borrowing efforts this way, as well.
3. The right type of loan
One more important thing worth considering is the type of loan that you’ll get. For business purposes, it’s probably best to look for business loans. Still, some sole proprietors prefer to finance their business from personal means (personal loans, etc.). Lending platforms, especially P2P platforms can also be quite handy, seeing as how some of these lenders offer decent terms even to borrowers with low credit scores. Then again, some borrow money from friends and relatives. All in all, the source of money is just as important as the amount that you borrow.
4. Alternatives to lending
Another thing you need to understand is that there are some alternatives to lending. Some of these are not necessarily ideal but in certain situations, the is your safest bet. For instance, borrowing money is great if you have a consistent income that you can rely on, however, what if your workflow is reduced and you’re uncertain of the future. Selling some of your company’s assets or even selling your invoices might be the best alternative. While factoring is far from ideal, it can be used in order to increase your cash flow quite drastically.
5. Interest rate is not the only factor
The biggest mistake that a lot of business owners make when borrowing money is assuming that the interest rate is the most important thing in the world. Other loan terms like the loan term duration, origination fee, early repayment options, autopay, lender’s flexibility and more can be just as important, if not more important. Different lenders also have different maximum/minimum loan amounts. What if this doesn’t meet your requirements? You should shop around in order to get familiar with base requirements.
6. Early repayment
While sometimes paying a loan early on can be a good thing, there are several reasons why this isn’t necessarily a good idea. First of all, some lenders have an early repayment fee, which means that you’ll end up paying more (in total) than you otherwise would. Second, you need to keep in mind that shortening your repayment duration will somewhat limit your opportunity to increase your income.
At the end of the day, when it comes to borrowing money for your business you need to learn how to recognize how much you need and when you need it. Once this is out of the way, you will have an objective and unbiased criterion according to which you can make estimates of different loan opportunities. What you do with this money once it’s deposited into your accounts is something else entirely.