Tailoring Business Financing to Your Success

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Hi, business owners. Today, we’re tackling the crucial topic of finding the right business financing for you. There are lots of options out there and it’s not just about getting the money. Yes, of course, you need the money to finance something in your business, but there’s so much more to it. If you make the wrong choice, you’re going to wind up with interest rates that are higher than they need to be, payment terms that don’t match what you can do, and much unnecessary stress. However, if you do it right, you have a great opportunity to fuel your growth and set up your business for long term success. So let’s dive in. Let me give you five things that you need to think about before you even start to look for financing.

First of all, how much do you need? How much do you need for the whole project? If you’re a manufacturer, buying a piece of equipment, sure, you can finance that piece of equipment. But what’s it going to cost to install it? Make any changes you need to your plant, train your people or anything else around this project?

Second, how much can you afford to pay each month? There are many more options with business financing than there are with personal financing. For example, you can do something like an interest only loan where for the term of the loan, you pay the interest each month, which is a very small payment. But at the end of the loan term, you need to pay the whole principle back. And that is a balloon payment and that is a big payment. That could be a big, big chunk of money. So you need to make sure that that’s something that you’re comfortable with.

Third, what kind of savings or increased earnings can you expect from this project? Be realistic here? Because those savings or earnings can yes, offset the cost of the financing, but you don’t want to assume that you’re going to be able to pay for the whole financing cost if you’re really not. Again, be really realistic here.

Fourth, when can you pay it off entirely? Are you paying it off as you go? As in level payments? Are you paying it off at the end? As in a balloon payment? Are there prepayment penalties or, prepayment options at all? I saw one contract with a client that even if they paid it off in advance, they still had to pay interest on the whole term of the loan as if they hadn’t paid it off early. So watch out for that.

Fifth what is the lender going to need from you? Are they going to need financial statements? And are those going to need to be audited or reviewed? Are they going to need tax returns? Are you up to date on your tax returns? If not, that could be a problem. Are they going to need any collateral? If it’s an equipment sale, equipment purchase or a real estate purchase, the collateral kind of comes along as part of the package. But if it’s something else, what do you have that could be used as collateral? And are they going to need a personal guarantee?

These are some of the things to think about. I am going to come back next week and talk about all the different options that you have. So stay tuned. This is Judi Otton and with GrowthCast and I’ll be back next week with a new Fiscal Fitness Tip of the Week.