Running or managing a business is not an easy feat. You are working around the clock to ensure that it will run smoothly. However, things can take a turn in running a business, and financial setbacks are inevitable. One day, you’ll find yourself running dry on your cash flow, and that’s the most devastating part of having a business.
Thankfully, many lending institutions support a significant portion of small business owners to get back to their feet and run their business in high spirits once again. And these business owners are taking advantage of this opportunity. But not all owners are knowledgeable on how to proceed with things, especially for those new in the industry.
They are usually the traditional business owners who save up for their business capital and rely on the profit income cycle. They think that borrowing money for their business can bring their business down eventually due to debt.
Understanding different loan methods and work out how much money to borrow is the first thing every borrower should know. This way, they can identify what specific loan methods work for them the best.
Personal loans and business loans are somehow similar to each other- they are full of loan methods you can choose from. To help you better understand and choose the right method, we will breakdown each type and present a few of its advantages and disadvantages.
Term Loan Option
The most popular type of loan method to support businesses is the term loan option. This type of loan method is the easiest to understand. A combination of a good credit score and an excellent payment history will give you decent payment terms.
This is best for corporate borrowing, especially if you need to fund your business to purchase new equipment, capital, or buy an estate.
- Lowest interest rate among other loan methods.
- You can borrow in high amounts depending on your business’s current income status.
- Look into other factors aside from the owner’s credit score and history.
- Be ready to handle and submit a load of requirements.
- Fixed payment schedules can be quite handy if you’re not prepared for it.
Tip: You can still utilize applying for a personal loan if you need extra funding for your business. You need to check out personal loans in your specific area. Personal loans come in handy for quick financing solutions.
Credit Card Option
If term loans are popular, using a credit card to finance your business is a popular choice too. However, it’s not that efficient as it’s very prone to some disadvantages that many business owners deem to be not a smart move for a business to grow. Using a credit card to finance the business is the easiest as long as you remain to have a good credit standing.
- It’s a quick and easy solution. No application is needed as you will swipe the card for any purchase.
- Works best when purchasing stuff and equipment for your business.
- High-interest rates and additional transaction fees.
- Business owners tend to be highly reliant on swiping the card and not using other efficient resources to effectively finance the business.
Determine the Purpose
When business owners intend to borrow money for their business, they have identified and determined the money’s purpose. That means they have already identified the problem in their business, and that’s where the money should go.
If the case is that the business needs new equipment, borrowing money is intended to support the business’s growth. New equipment means better customer service, which will then yield results in a better income flow.
In another case, if the business is growing, expanding, and having a new branch is a perfect idea. Borrowing money to capitalize on that new branch will then get more customers and widen the business’s scope.
As you can see, if you have determined the purpose of borrowing money for your business and if you have studied that it is income-generating, there’s no reason for your business to be buried due to overdue debt.
Assess How Much You Need
This is why you must identify the purpose of the loan. You will then assess how much you need. Identifying how much money you need to borrow is a great asset when applying for a business loan. This way, the lender can see you as a straightforward and critical thinker, which makes up a good character of a responsible payer.
You have a budget in mind that you need to work out, and specifically, the borrowed amount can help you make that happen. Not that it only shows your character of being a responsible borrower, but it also goes to show that you know your capacity and capability in repaying the loan.
Managing a business is not for the faint heart. It’s challenging and difficult as it correlates to how you efficiently and effectively can handle finances personally. It takes practice and experience to be wise in handling your business finances effectively. Fortunately, there are guides and references out there that can be a great source to help you sort things out and run your business better. And borrowing money wisely is one of them.