Business financing comes with a lot of options and lots of benefits and costs to your small business growth. When comparing financing options there are a few critical areas to examine. Overlooking this step in researching your future financing partner may lead to unfavorable financing that damages your cash flow or stalls your business growth.
Areas to Examine in a Business Financing Contract:
- CONTRACT LENGTH
- CUSTOMER SERVICE
- TIME TO FUNDING
Business funding from investors (equity-based funding) will be your least expensive option. The downside to this method of funding is that your trade some control over your business for financing it. I encourage that you trade as little equity as possible, but this will be at the expense of the financing offered to you.
The Cost of Debt-Based Funding
On the other hand, there is debt-based funding like a bank loan or online loan. I often warn prospective clients to READ THE FINE PRINT of your financing agreement. Online loans can come with high interest rates and unfair repayment terms. Also, missing a repayment will be costly.
Are Bank Loans Best for Small Business Funding?
While bank loans are probably your best best in terms of keeping control over your business and having access to inexpensive business funding, you may not qualify for one. Banks have to see some time in business, profitability, and credit scores (often both personal and business) to determine your rate and extent of capital they will lend you.
Improving Cash Flow Should Be Your Goal
The majority of failed businesses cite cash flow as the reason for failure. So when looking at your funding options—and there are many—make sure that you are improving your cash flow. A flexible funding option that supports and enables business growth will have infrequent repayment dates in addition to favorable interest rates. Evaluate what your business needs, and remember that you can always find a supplementary source of funding like a line of credit or asset-based funding.
The majority of failed businesses cite cash flow as the reason for failure.
Benefits of Asset-Based Lending
Asset-based lending (ABL) is putting your business assets as collateral for financing. This can come in many shapes and sizes. For instance, an equipment financing deal would mean a lender has ownership over your business equipment (think: trucks, machinery, etc.) in exchange for an injection of cash. Another form of ABL is selling your open invoices to a factoring company. This means that the lender has ownership over your receivable (and will wait the time period it takes for your customer to pay the invoice) in exchange for an upfront sum of money.
Each business funding comes with pros and cons. Take a look at:
- HIDDEN FEES: You don’t want to be surprised by anything in your financing agreement.
- FLEXIBILITY: Will you have access to more funding down the road or is it a ‘one and done’ offer of money?
- CONTRACT LENGTH: This goes with flexibility. Will you be able to secure additional financing or change lenders if you decide the method you chose was not the best fit for your business?
- CUSTOMER SERVICE: Are you able to speak to someone on the phone if there is an issue that comes up? Are you able to reach a decision-maker or just a call center? You hope that there won’t be any hiccups in your financing, but this is life. It’s best to know you can resolve issues painlessly as they arise.
- COST: Will your financing option improve your cash flow or drain it? Online loans that are easy to obtain may require daily or weekly repayments. This will hurt your cash flow and could lead to a default situation.
- TIME: How soon can you access your funds? Bank loans may take months to approve. If you can afford to wait, then this isn’t an issue. Would you be able to afford to wait when reapplying for more financing?