Now more than ever, small business owners need to invest the time and effort to understand the financing options available to them in order to make the right choice to meet their objectives. With so many alternatives on the market, the consequences of failing to do adequate research or read the fine print when assessing whether and how to borrow can prove costly.
At Summit Financial Resources, we advise our clients to be clear about what they need and why, know what they are agreeing to, and make sure they work with a lender who has their best interests at heart. We know that securing the funding you need to grow is critical, but developing a relationship based on mutual trust and respect is essential to creating a win-win for your business and for ours. With this in mind, here are some basic dos and don’ts to help you avoid some of the most common financing pitfalls.
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DO Borrow Only What You Need
Before you borrow money for your small business, you should have a solid idea of how much you need and how you will use the funds. Many small business owners borrow too much money, spend it unwisely, and end up with debt they are unable to service. On the other hand, insufficient financing could leave you facing a cash crunch in the face of unexpected expenses.
To help you decide the amount of financing your business needs, here are some key questions to ask yourself:
- What do you need the money for?
- How quickly do you need it?
- What is the current financial shape of your business?
- How much collateral, if any, do you have to put up for the loan?
- Do you feel confident that you can pay back the loan on time?
Answering these questions will help you determine how much money you need as well as what type of business loan and lender to pursue.
DON’T Limit Your Options
There are countless financing options for small business owners, from government-backed grants and traditional bank loans to cash advances and asset-based lines of credit. Lenders are all vying for your business, so it’s wise to shop around.
Research what’s available and decide which is the best fit given the stage of your business, your revenue, and margins. It is important to be realistic about your chances of accessing different funding options based on what lenders require.
DO Borrow at the Right Time
Many small business owners wait until the need for financing is critical before they start looking, which can put undue pressure on your business and narrow your options. However, if you borrow too early, you may be tempted to spend the money on immediate needs instead of what you borrowed it for in the first place.
Running a successful small business requires planning and preparation. Taking a more strategic, proactive approach and seeking financing before your situation is urgent can make the borrowing process less stressful and more beneficial in the long run. Whether you need working capital to expand, purchase equipment, or add staff, planning in advance of when you need the money allows you to thoroughly investigate your financing options and find the best solution.
Keep in mind that one of the most important things about borrowing money for your small business is having the cash flow to service the debt. If you are not confident that your business can generate the revenue needed to make payments consistently and on time, this may not be the right time to take a loan.
DO Keep Track of Your Financials
One of the keys to optimal business performance is tracking your financials and being diligent about keeping your records up to date. Maintaining accurate financial records is even more critical if you plan to look for financing. Prospective lenders are likely to request sales revenue, profit and loss documents, tax statements, and other financial data to determine the viability of your business. Failure to respond quickly with this information could put your approval in jeopardy.
If you haven’t already, invest in an accounting software system to simplify the process of managing your business financials. These programs help ensure accuracy and can also speed up your cash flow, reduce costs, and improve your budgeting. You might also consider working with an accountant who specializes in small businesses and can assist with cash flow review and forecasting and offer advice on ways to improve efficiency.
DON’T Forget Your Due Diligence
It is essential that you conduct due diligence on any lender you are seriously considering working with, even if they have been referred to you or have a recognizable name. This can be as simple as a Google search using the lender’s name followed by the words “fraud”, “scam”, or “lawsuit.” The Better Business Bureau is a good source for information regarding complaints made about unfair terms or hidden costs, and your local Small Business Association office can help you determine a lender’s credibility.
With the rapid growth in online lending, it is important to keep in mind that these lenders are not regulated the same way as banks and other institutions. You need to make sure you are crystal clear on details, such as the annual percentage rates (APR) and cash flow implications. Some lenders, such as those offering merchant cash advances (MCAs), may require repayments made through fixed daily or weekly debits from your bank account, plus fees, until the advance is paid in full.
In addition, MCAs have been known to carry APRs that drive the total cost of a loan into the triple digits. For many small business owners, the high cost and daily repayment schedule associated with MCAs can actually add to their existing cash flow problems.
DO Choose a Partner, Not Just a Lender
Summit Financial Resources bridges the gap between easy, but expensive financing and lower-cost, harder-to-get traditional loans. We offer working capital loans for small to medium-sized businesses that involve using your accounts receivable and other assets as collateral. We can mix and match from a variety of product options to suit your needs, including invoice factoring, asset-based lending, inventory lending, and equipment financing.
Because we are not regulated like a bank, we can structure more flexible deals, take more risks, and make funding decisions quickly. We partner with our clients to reach their business goals, creating custom financing solutions with reasonable rates and a structure that banks and other commercial finance sources cannot provide.
As a small business owner, you know that financial mistakes can seriously impact the future of your business. Summit Financial Resources is committed to helping you avoid potentially costly errors and provide the working capital you need to thrive.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.