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4 Basics of Financing a Business

4 Basics of Financing a Business

Financing a business can either mean you’re expanding, opening up a new business, or making new changes. Depending on your profit potential and capital, there are instances when you’ll need that added financial assistance to come up with the amount needed for your business. Typically, these are in the form of loans, but unlike other loans, one that’s used for financing a business is said to be a good one simply because it’s for a greater purpose: eventually earning profits. Hence, you aren’t on the losing end.

For you to enjoy that, it’s important to understand the basics of financing a business. In doing so, you can avoid many pitfalls and have more success in your own endeavors.

To help you beef up your knowledge, here’s a list of some of the basics you may want to know about financing a business.

Be Prepared with Your Collateral

First things first: you may need to assess what properties you have as your collateral if you’re going to take out a loan for business financing purposes. Banks lend money to startups or even for expansion, but this isn’t given freely. Collateral will almost always be asked for so the bank, or any other lending institution, for that matter, has a means to protect themselves in case you won’t be able to pay for the loan.

It’s important for your business to have hard assets you can mortgage to the bank for the payment of the loan. If you’re still a small business and you don’t have business assets, you may also need to be willing to have some of your personal assets as collateral.

Have a Business Plan

It’s best to have a business plan. Many commercial loan companies are going to ask for it to verify whether the amount is needed for business purposes.

The business plan often has to be thorough, such that it includes the financial side of your planning or your feasibility plan. This can give credit institutions a basis to decide whether it’ll be risky to loan an amount to you or if your business has a positive five-year or ten-year outlook.

Understand How Financing Can Affect Your Business

Yes, financing can bring more money into your business, but try to go beyond that and think harder how it can affect your business. What positive effect does it bring to your business? Is it meant to increase your capital? Or is it for an expansion in another state?

When you understand how the financing can affect your business, it makes it easier for you to put things in perspective. It also makes it easier for you to come up with the business plan to determine which facets of your business are going to be responsible for this and that.

Most importantly, you may need to understand how the payables will affect your business financially. For instance, the taxes and interest payments you make can affect your commercial property. To learn more about this, continue reading here.

Know Your Financing Options

To encourage the popping up of small businesses, there are many financial institutions that now have generous offers with their financing options. Hence, there’s quite a variety for you to choose from. It’s best to choose according to your needs or which one will work best for your business.

Early on, it’s important to come to terms with your options so you know what you’re looking at. You could make a more informed decision when you know what each option entails. For example:

  • Self-financing: This refers to financing your business without any help from a credit institution. This is generally fine if you’re financing a small business and you’ve got sufficient savings to cover the capital needed. The good thing about self-financing is that you aren’t indebted to any institution and you aren’t tied up with a hefty interest payment.
  • Investors: These are those individuals or institutions who have sufficient money to beef up the capital you need for your business. But in exchange for lending money to your business, they also have a share in the profits as investors.
  • Business loan: This is the way to go if you want to have substantial ownership and control over your business but don’t have enough financial capability to pay for it. A business loan could be a smart option as long as you research thoroughly and you’re getting the best terms.

Conclusion

Now that you probably have all of your concerns about financing a business done and settled with, it’s time to move on toward the next step of your business growth. Especially if you’re still new to business financing, surely this could serve as a primer to beef up your knowledge. Try not to take matters related to financing lightly. Remember this could affect your business greatly, and you’d want this effect to be nothing short of positive.


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by Lottie Pritchard // Lottie Pritchard is a contributor to Businessing Magazine.

Opinions expressed by contributors are their own.