What are 4 big considerations that entrepreneurs should have about their business financing?
Getting a business loan is an important step -- one that can take your company to the next level. And, getting a business loan means additional things to think about. No matter the loan type -- whether it's a traditional bank loan, a line of credit, or a business credit card -- all small business owners can benefit from revisiting their financing needs all year round.
Consider making a quarterly plan to ask yourself these questions to make sure that the business loan you have is the best one for your financing needs.
1. What's my credit score? (Business credit score and personal credit score)
The best thing that small business owners can do to maximize their financing options is to keep an eye on their credit scores. The first thing that any potential lender looks at is your credit scores -- both your personal credit score and your business credit score. Especially if you're new to being a small business owner, you'll need to maintain or build good personal credit. Over time, your business will build its own credit score as well. Ideally you'll be able to avoid getting loans based on a personal guarantee.
- If you have bad credit, know that you can rebuild your credit history by making all monthly payments on time (this includes any consumer credit cards).
- Keep plugging away at on-time payments until you have a good track record going.
- Once your credit scores improve, you'll be able to get better business loans should you need them.
2. What's happening with my cash flow?
Some related questions include: How are your loan payments going? Do you have enough working capital? If not, do you need a larger loan amount, or need to open an additional business line of credit? What's happening in your bank account?
Set aside a day to review your financial statements. Make sure you have enough bandwidth in your cash flow for your daily operations. Many small business owners pursue small business loans specifically so they have enough working capital while they pursue expansion. If you're stretched thin with your day-to-day costs and you're not actively scaling your business, you'll need to evaluate how much money you have coming in and going out. Is it possible that you need a new business approach? Could your working capital benefit from, say, a line of credit? Checking on your cash flow is a good way to start answering the above questions.
3. How are the interest rates on my current small business loans?
Interest rates change with time . . . sometimes they go up, sometimes they go down. After you've made a certain amount of payments on your current loan, you may be eligible to refinance. If it is indeed a good time for you to refinance, do some comparison shopping on your financing options.
- Check out a different type of loan. The best are often Small Business Administration loans (also called SBA loans), traditional term loans that are backed by the US government, but there may be other options with decent interest rates (or at least better interest rates than what you're paying right now).
- Look down the road. Will your total cost of capital end up being more than what you're already paying on your current loan? Or can you save money by switching? Maybe there's another option with a way better annual percentage rate.
- Look close by, too. Would your current lender consider giving you the same loan type but with a more favorable loan term? Or maybe a better interest rate?
Remember that refinancing does involve going through a loan application process again, so you'll want to have your credit scores in great shape before you start.
4. Should I revise my business plan?
Revising your business plan would be a last step, after reviewing all of your company's financials each quarter. If your income, your credit scores, your cash flow, your available credit, or any other part of your company's financial information changes significantly, you may need to adjust your business plan to reflect changes in your anticipated income. Maybe your current business loan isn't working out and you can't make the monthly payments.
- Maybe your annual revenue has gone up so much that your cash flow is 100% flying free, and you don't need a business loan anymore.
- Maybe you're somewhere in the middle and decide to refinance to a better business loan.
- Or you qualify for better (less expensive) types of business financing.
- Maybe you suddenly need to buy out the other business owners, or otherwise have some major unexpected expense crop up.
These are just a few changes that could result in an update to your business plan.
At the end of the day, your company is a changing entity with its own ebbs and flows. Small business needs can change over time, and it's natural for small business financing needs to reflect and be a part of that. By regularly asking yourself the above 4 questions, you'll be able to determine whether the business loan you have is the right one to help your company grow.
By Chaia Milstein, Biz2Credit Chaia is the Editorial Manager at Biz2Credit, a company that matches small businesses with the funding they need to grow and thrive.