Securing Your Credit

A business plan serves as a road map. It defines your business, sets goals, and explains how you plan to meet these goals. On a personal level, it offers a cohesive vision and will help you oversee your business. On a financial level, it gives bankers a sense of what your business is and how you plan to make a profit.

Being able to present your strategic business plan to your banker will help him or her gain a better sense of the business’s future stability. Aside from your business plan, submission of KYC documents are mandatory and business and personal profiles have to be acceptable. Business plan and discounted cash flow must be convincing.

Know your current cash flow and expected revenue. Think about the ongoing costs, such as rent, utilities, payroll, equipment, and supplies. Securing a loan, in whichever form you seek out, can be meaningful and even lifesaving to your business. It’s not without risk though. Rates are high, banks are lending at reduced rates and increasingly risk-averse institutions are slowing or freezing a process that used to be completed over a quick review of the financials and a handshake.

If your business is growing and your reserve accounts are overflowing, do your future self a favor by building a war chest with at least six months of operating capital. Otherwise, get your financial documents in order and begin building relationships with banks in your area. You never know when you’ll need that lifeline.

Business financing is available to meet virtually any need that you may have. Borrowing for wrong reasons or exorbitant costs will be too detrimental. If any restrictions for use of credit lines for your business, be careful not landing in contravention of lending terms. We shall also look into economic cycle indicators and market realities of the business.

From term loans to merchant cash advances to venture capital, you’ve got plenty of options to choose from. It can feel a bit overwhelming if you don’t know where to begin. There are two basic ways to finance a small business: debt and equity.

Debt – a loan or line of credit that provides you a set amount of money that has to be repaid within a period of time. Most loans are secured by assets, which means that the lender can take the assets away if you don’t pay. A loan can also be unsecured, with no specific asset securing the loan.

Equity – selling a part of your business (known as selling an equity stake). In this case, you don’t usually have to pay back the investment because the new owner of the equity gets all benefits, voting rights, and cash flow associated with that equity stake.

Regardless of the product name, all financing solutions consist of either debt, equity, or a hybrid combination of both. Keep in mind that there are no “good” or “bad” solutions. The best solution for you depends on your specific circumstances and requirements. Some of the more common financing options for small and new markets are:

Savings – Perhaps the easiest way to finance a business is to use your own money. In an ideal world, you should save money for a period of time and use this money to fund your business. This is probably the wisest, most conservative, and safest way to start a company. However, an obvious problem with this type of financing is that you are limited by the amount of money you can save. Saving to start or operate a business is a great idea. However, we are against using retirement savings, home loans, insurance loans, and similar sources to finance risky business ventures.

Credit Cards – Credit Cards can be very helpful in extending your working capital and alleviating cash flow problems, especially if you use to them to pay suppliers. Be careful not to overextend yourself and remember that your credit score is affected by how you use the card.

Friends and Family – Asking friends and family to make an equity investment can be a good way to finance your company. Be sure to get the agreement in writing and have a lawyer draft it for you. Also, you should spend a lot of time educating your investors about the risks of your business. Lastly, you should consider reminding them to only invest money that they can afford to lose.

Lines of Credit – This is a great way to finance a business. Lines of credit are particularly helpful to handle cash flow shortages. However, getting this type of financing is difficult and is seldom an option for small companies with limited experience.

Purchase Order Funding – It only works if the transaction is for the resale of finished goods and if gross profit margins are 30% or higher. However, if your transaction qualifies, it’s a great tool to handle large transactions without giving up equity. Like factoring, qualifying for po funding is relatively simple.

Business Incubators – Business incubators (or “accelerators”) generally focus on the high-tech sector by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization and hosting and sharing services. Commonly, incubators will invite future businesses and other fledgling companies to share their premises, as well as their administrative, logistical and technical resources.

Factoring – Factoring is a unique funding solution in which you sell your outstanding invoices to a third party company, called a factor. The factor advances you a percentage of the invoice balance. The factor then collects on the invoice from your customer, deducts a small fee, and forwards you the balance.

Investor – Another option may be bringing in an investor. A private investor can be a good source of quick cash. The investor may also be more flexible in terms of their requirements. They could be more accepting of storied credit or cash flow troubles.