Do You Have Business Financing Figured Out? 3 Tips To Become A Sharp Borrower | Behalf
When it comes to your business, you know the space inside and out. You’re passionate about what you’re selling and have a good understanding of your competition.
But, as you sit down at your desk with your computer and yellow pad at hand, you realize that running your business means so much more than understanding your market alone. You need to figure out business financing to run and maintain production.
Aside from the stats of what you can qualify for, what tips can help you ensure that you’re making the right financing decision for your business?
Here are some tricks of the trade to help you become a sharp borrower:
1) Evaluate the cost of the loan, according to its structure
This might seem like a no brainer, but evaluating the cost of a loan can actually be a bit more nuanced than you may assume.
A common way of calculating the cost of a loan is by looking at the Annual Percentage Rate (APR). APR evaluates the cost of a loan based off of a yearly cycle of compound interest and inflation. But what if your loan will be repaid before the money has the chance to go through this yearly cycle?
For example, if you take out a loan of $5,000 and are given net 30 days to repay it at an interest rate of 2% a month, then you would be paying a borrowing fee $100. If you calculated the APR as if you were stretching the loan over the course of a whole year, at 24% (2% per month times 12 months), then you would be paying at least $1200, plus inflation and compound interest. But, as you aren’t stretching this loan out over the course of the year the APR isn’t indicative of the cost of the loan.
The best starting point to understand the cost of a loan is by taking a look at its repayment structure. Only then can you evaluate whether the loan’s interest or its APR is the best method for evaluating the cost of financing.
2) Take note of your cash flow projections
Your ability to make loan repayments relies on you having the cash on hand. Work with flexible borrowers who will allow you to frame your repayment schedule according to cash flow highs. For example, if you’re working in a seasonal business, scheduling loan repayment after peak times can ensure you have enough cushion to get through the low-season.
Similarly, if you’re starting out your business and want to test the waters of how profitable a product will be, choose a shorter repayment schedule. This offsets the risk of bringing a new product to market as you’ll be making smaller and manageable repayments, rather than having the burden of a hefty loan hanging over your head.
3) Communicate with your perspective lenders
As you may have heard when growing up, any relationship that is a secret isn’t one to get involved in. The same is true with your lender. Does your lender report to one of the many credit bureaus, such as D&B?
If a lender reports to a credit bureau that means that loans repaid on time can be rewarded with an increase in your credit score. Look for lenders that will help you maintain or improve your business’s financial standing.
Finding the right fit for your business
Asking the right questions and doing your homework will help guide you through the maze of lenders out there and narrow down the right loan options for you. Remember that nothing is set in stone, no matter what stage your business is in it is always important to reevaluate and assess whether your financing is right for you.