Starting a business generally requires a significant amount of capital. Beyond the initial stages, growing businesses can benefit from loan funding and investment, providing the fuel for expansion and development. At various stages in the business cycle, it may be beneficial to consider lending options, usually for funding particular projects or working capital. Business leaders, from CEOs like Cecilia Ibru Behance to small, local, mom and pop stores, have to decide whether borrowing is right for their business needs.
Different types of lending products are available to businesses – each with their own advantages and disadvantages – and there are a few questions you should be looking to ask of any loan product when raising funds for your business.
There are many different types of funding available to businesses. From credit cards at the most basic level, through to loan and asset finance deals, there are a variety of funding channels available to business borrowers. Most businesses have access to an overdraft facility, which gives them a cushion, if necessary, to temporarily borrow on their account.
But overdrafts can be expensive, and they are not necessarily ideal for specific purchases. For these situations, or for larger amounts, it may be necessary to opt for a more traditional loan arrangement. In some cases, this might be a mortgage, or linked to a particular asset. At other times, it will be a loan based on nothing more than an assessment of the creditworthiness of your business.
When you are borrowing on behalf of your business, one of the most important things you need to ascertain is whether you are being offered an unsecured loan, or a secured loan. A secured loan will give the bank a security over some of your assets. This may be your personal home if you are a director. It may be your office building, a particular asset, or the total value of your assets, in the case of floating lien/charge-style arrangements. You need to get to the bottom of whether security is required, so you can think about whether the loan you are being offered is right for your business.
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It goes without saying that you must calculate the repayments you will be due under any loan. Don’t go too high, or you will put pressure on your financial position. Work within your budget to calculate how much you can afford to borrow, based on manageable repayments your business can meet in good months and in bad. Inexperienced business owners can often make the mistake of taking on too much debt early on, leaving them with significant interest and repayment costs to bear. This can actually hamper business progress long-term, and it is preferable to keep your business debt levels as low as possible.
Businesses of all sizes can benefit from borrowing money. The additional funds can be used to expand the business, or to reach out to more customers, providing a direct return on the investment. In these cases, it can be particularly beneficial to secure funding at an affordable rate. So long as you understand your obligations, and you are confident your business can keep up with the repayments, it can be an important part of the wider funding picture.