The ABCs of Small Business Financing: A Guide for Entrepreneurs

By Kaleem Ulah

November 27, 2023

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Business owners and entrepreneurs need to take additional measures when learning how to manage their finances. This is because they not only need to understand how to manage their personal finances, but they also need to understand how to manage the finances of their businesses. When you own a company, you put yourself in a wonderful position to increase your wealth through your business' operations.

When you work to maximise your company's profits, you increase the wealth it generates. Consider your company not just as a source of income but also as a financial asset that has the potential to develop over time. If you can make your company more valuable financially, you can accumulate more wealth for yourself as a business owner. This comprehensive guide will teach you all you need to know about business finances.

What Is business financing?

If your company is a big one, you will require access to capital at some point in the future, and the best way to get that is through business financing. Even many large-cap corporations frequently look for new funding sources to meet their short-term commitments. Finding an appropriate method of funding that works for a small business is of the utmost importance. If you get your money from the wrong place, you could lose a portion of your business or get trapped into repayment terms that would hinder your company's expansion for many years.

When it comes to your company, one of the first things you should consider is how you will obtain funding. It is also the most significant financial decision you will have to make during your adventure. Business loans can benefit a company, but you shouldn't approach them flippantly.

Types of small business financing options

Let’s look at a few common ways to fund a business

1. Term loan

This common type of financial assistance for small businesses is known as a term loan. In this kind of loan arrangement, the borrower agrees to pay back the bank a predetermined sum of money at predetermined intervals throughout a predetermined time. The interest rate for term loans can be fixed or variable, depending on the borrower's preference. These loans could require a significant down payment to reduce the monthly payments and overall costs of the loan. Term loans are the most common financing choice for established small firms which have been running for at least two years. Instead of using it to fund day-to-day needs, they use term loans to purchase assets (such as equipment) or growth investments.

2. Merchant cash loans

You can receive this money all at once in exchange for a predetermined payment. The funder purchases a proportion of your future sales using this model and then collects a percentage of daily sales by withholding a portion of the proceeds from any credit or debit card transactions your customers process. The type has no predetermined duration because the sales volume experienced on any given day can vary greatly.

3. Equipment financing

At some point in the life of your company, you may be required to make purchases, upgrades, or replacements of various equipment. Loans for the purchase of equipment are available for this purpose. There is a subcategory of small business loans known as equipment finance, and its primary purpose is to assist business owners in purchasing necessary machinery and tools. These loans are for various products, including office furniture, commercial ovens, medical equipment, computers, heavy-duty manufacturing equipment, and more.

There will be variations in the terms depending on the lender. On the other hand, you can finance approximately 80% of the total buying price of an item. A small business equipment loan typically requires a down payment of twenty percent of the total loan amount. You immediately become the owner of the equipment.

4. Lines of credit

The management of a small business requires constant adaptation to a variety of shifting circumstances. If there is a growth opportunity that you want to take advantage of, you may need cash quickly. If you are looking for a solution that offers flexible monthly payment terms and is comparable to small business loans, an unsecured line of credit can be an excellent choice.

A line of credit for a small business is more like a credit card than a loan. It provides you with access to money that you can use to address any and all needs that may arise in your business. When you open a line of credit, you won't get a lump sum payment, which means you won't get all the cash at once. You are not required to spend a certain sum of money; rather, you are free to utilise exactly that sum that is necessary; this, in turn, enables you to manage your company's finances better. In many instances, this prevents you from paying interest on funds you do not require, saving you money.

In a manner analogous to a credit card, interest will accumulate when you withdraw money from your line of credit. Your remaining credit determines how much of your accessible balance you can spend at any time. Your available credit will increase proportionately as you pay back the borrowed money. Lenders will impose a cap on the total amount of money you can borrow.

5. SBA loans

The Small Business Association, also known as the SBA, works with several lending institutions to provide small business loans to entrepreneurs operating small businesses. The Small Business Administration does not make loans directly to the borrower. It establishes the criteria that must be met for its partners to be eligible for small company loans. Small business entrepreneurs with trouble being authorised for other lending programs might obtain assistance from the Small Business Administration (SBA).

For instance, if a bank refuses to lend money to your company because you have poor credit, the Small Business Administration (SBA) may be able to guarantee the loan. When this occurs, there is less risk for the bank, which results in the bank being more likely to offer the loan to the business. The SBA offers a range of loan amounts that can accommodate various commercial financing requirements. Certain programs have restrictions and conditions that applicants must meet. In general, the terms of small business loans are more favourable, and a wider variety of credit profiles are eligible to apply for these loans.

6 Financing tips to help small businesses 

If you skeptical about improving your business finances and you are are the verge of giving up, these tips are for you.

1. Pay your personal and business debts 

If you have any personal or commercial debt, you should work to get rid of it as soon as possible because carrying debt costs money in the form of interest expenses. It is possible to run into trouble with your cash flow and your ability to file for bankruptcy if you have excessive debt. Be careful not to put too much of your or your company's equity at risk by taking on too much debt if you already carry a balance.

2. Stay within your financial means

Even people with millions of dollars in the bank must live within their means. To spend less money than you are bringing in each month is what it means to live within your means. When you live over your means, it means that you spend more money than you make, which ultimately leads to debt. Your total wealth will decrease as a direct result of your debt.

It's not a matter of how much money you make, but rather how well you handle the money you have, that determines whether or not you become wealthy. When you apply your knowledge of financial concepts to both your personal and professional finances, it will lead to an increase in your net worth. If you want to know how wealthy you are, simply look at your net worth; the higher it is, the more money you have.

3. Have a budget and stay true to it

Developing a budget for your small business is essential to forestall the accumulation of unmanageable amounts of debt. This will assist you in distinguishing between the "must-haves" and the "wants" in each aspect of your business operations. Even though 59% of business owners who apply for loans intend to utilise the funds to expand their operations, you should ensure that you are not simply opening business loans and credit cards left and right without knowing how much money you are spending. Creating a budget for your company and following it, then using loans to pay down unneeded spending, will allow you to focus on longer-term investments in your company, such as investing in staff and technology. Creating and sticking to your company's budget will allow you to focus on these longer-term investments.

4. Have some emergency funds

Setting money aside in a separate account for use in unexpected circumstances gives you the peace of mind that comes from knowing that you are prepared for any seasonal changes or dips in the market. This will also add peace of mind if setbacks or barriers develop, which most people who own businesses may experience at some point or another. It is not important whether you encounter a setback; rather, what matters is how well-equipped you are to weather the storm when it does come.

5. Keep an eye on your spending

Overspending is one of the factors that has the most significant impact on the finances of a small business. To begin, you need to get control of your costs and only spend money on absolutely necessary things. Find creative ways to decrease costs that aren't absolutely essential, such as upgrading to less expensive software, cutting down on the amount of money spent on employee travel, and minimising your overhead expenses. If you keep track of your expenses, you can determine the areas of your company's operations where you may reduce spending and generate cost savings.

6. Review your price structure

It is essential to perform regular audits of your pricing strategy to ensure your business continues generating a profit. Regardless of whether you sell things or services, it is crucial to strike a balance between affordability and profitability. Research the market to determine the prices your competitors are charging for products or services comparable to your own, and think about modifying your prices accordingly. Also, keep in mind the psychology of pricing, as adjusting your prices by a few cents here and there or adding a discount package can often make a significant impact in sales. Remember that your pricing plan can determine the success or failure of your company, so adjust it as necessary and watch your revenues skyrocket.

Conclusion

As a small business owner, every financial decision you make will tell on your business and it’s overall growth. You need to ensure you are on the right path in your finances. Getting a professional financial planner can take away all the stress and fear of failure. The Kalculators is available to help you plan your business finances while also keeping your books accurately. You shouldn’t wait until you run bankruptcy before hiring us. It is better you start planning now to avoid running out of business. You can contact us on how to get started or enjoy our free consultation for your business’ sake.

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About the Author / By Kaleem Ulah

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Kaleem is CEO & Author at "The Kalculators". With more than 10 years of experience in financial services, He built Kalculators to transform your financial challenges into strategic triumphs!

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