How can financing help your small business?
The United Kingdom owes a huge part of its economy to small businesses. According to a 2014 report of the Federation of Small Businesses, small firms make up 99.3% of the enterprises in the private sector and employ 15.2 million people with a turnover of almost £200 trillion.
But the downside is that only 50% of these businesses are able to sustain themselves up to 5 years. Those who survive, meanwhile, are facing huge challenges that prevent them from growing.
The question is why.
One of the foremost reasons is money. Many small businesses can start with hardly any capital. For example, if you go into freelancing, more often than not, you need only skills and training, perhaps a certification depending on the federal and state laws. Most of these enterprises are also home based, so owners do not have to pay for rent and even let personal accounts absorb utilities (although this is not the most ideal setup).
The problem usually begins when the business wants to grow. After all, it is only when you expand that you can earn more profits and gain a higher cash flow.
As a small business, it may take a while before you can save enough cash for expansion. If you are in a hurry, you dip your hands on your profits and savings, but then, it leaves your current business in danger. Where would you get money in case earnings are not good but you have some expenses to pay?
While you can always borrow from friends and relatives (oftentimes with zero interest), you will get more funds if you look for financing or a business loan.
A number of business owners are apprehensive of getting a business loan for a common reason: they think loans are bad.
Loans are not created equal. When managed properly, they can make your business grow. A business loan, in this case, is an example of a good debt, provided that you choose them wisely and you pay them promptly.
They also have several benefits including (but not limited to):
- Potentially huge additional capital: Of course, as a small business, you may not be able to loan millions from any lender, more so if it is your first time. Nevertheless, there is a good chance it is a much bigger amount that you can ever get from other sources or from your savings.
- Cash flow control: Loan repayments are spread over time, so you have more control over your cash flow.
- Tax deductions: If you are running a corporate entity, you can apply for a business loan and deduct your taxes with interest repayments.
- More stable repayments: One of the best things about business loans is you do not only have access to a huge amount of money, but you also have a better idea of your repayments, especially if the loan is fixed rate.
- Access to better business loans: a business loan gives you an opportunity to get a good credit score. If you do, then obtaining another debt for your business is easier. A good credit score depends on the lender, but usually they like one that is at least 600.
- Several sources: When you want to get a loan, the first thing that comes into your mind is a bank. But there are also other lenders that can secure you one. These include credit unions and even angel investors. Credit unions usually offer much better loan terms since they are not at the mercy of investors.
What to Do
Indeed, not all types of debts are bad. At some point, you need to apply for business loans so you can implement all your plans more quickly and take advantage of the growing market.
But it is also important that you choose the right financing. The following questions may help you decide:
- How much money do I need?
- How soon do I want to repay it?
- Where do I plan to use the funds?
- What are my potential options?
- How is my credit score?
- What is the track record of the lender?
- Is this a payday loan? (Avoid payday loans!)
- What are the payment terms and the interest rate?
If you find yourself in between questions of when to grow and how to grow your business, remember first that you with your small business have a big stake in the national economy. Your business is poised for growth so study and consider the financial options that can back you up as you grow.