Looking to fund your newest entrepreneurial endeavour? Whether you’re launching a start-up, investing in equipment, or expanding into new markets, most businesses rely on borrowed capital at some point.
But before you rush to apply for a loan or open a line of credit, take a step back. Consider which financial option aligns with your current needs, how much capital you need to support your objectives, and how you plan to repay the money.
Here are some smart borrowing strategies to help you make more informed decisions about financing your business.
Know your options
Before you can determine which borrowing option is right for your business, it’s important to understand what’s available. Common options include government small business loans, lines of credit, and business credit cards. Each comes with different qualification requirements, costs, and levels of flexibility.
For example, a small business loan typically requires a detailed business plan, financial documents, and a strong personal or business credit score.
Similarly, a line of credit requires financial documentation, a solid credit history, and evidence of consistent cash flow to support repayment.
Business credit cards, while generally easier to access, still require meeting minimum income and credit score requirements.
Choose the right financial tool
Different borrowing needs require different financial tools.
For instance, if you need to purchase a large amount of material or supplies upfront to do a client job, you might opt for a business line of credit.
If you’re looking to lease a new office location, you might apply for a business loan.
If you want a financial tool to help cover everyday purchases, like travel, office supplies, or digital marketing, a business credit card is a good option.
Understand the full borrowing costs
To understand the full cost of borrowing, you need to look beyond the interest rate. A better way to compare borrowing options is by using the annual percentage rate (APR), which includes fees and total borrowing costs.
A business loan or line of credit might come with origination fees, registration fees, and prepayment penalties. Plus, with a loan, you’re stuck with a monthly payment, which includes interest, for the term of the loan.
With a low-interest business credit card, you only have to worry about paying interest, and you only pay if you carry a balance.
Establish and build your business credit profile
As an entrepreneur, you’ll likely need access to financing at some point, whether to purchase more stock, hire staff, or upgrade equipment. A strong business credit profile signals to lenders that your business is financially stable and reliable. Establishing and building your business credit allows you to unlock better loan terms and access to larger credit limits. By lowering your borrowing costs, you free up money to do the things that move your business forward.
It takes time to build credit, and the length of your credit history is one of the factors used to determine your credit score. Generally, the longer your history, the better. So, the sooner you get a business line of credit, loan, or business credit card and begin building your business credit profile, the better.
Look for low-interest borrowing options
Low-interest financial tools, like a low-interest credit card, can help to keep the cost of borrowing down. While a regular business credit card might charge you 20% in interest, a low-rate card may reduce your rate to 13% or lower. This is especially important if your business carries a balance from month to month.
For example, if you carry a balance of $3,000 on your business credit card for three months with a 20% rate, you’ll pay $150 in interest. With the same balance on a low-rate card at 13%, you’ll pay approximately $98 in interest. This represents savings of around $52 over three months, or more than $200 per year.
Borrow before you need the money
Ideally, you want to look for borrowing options when your business is stable and performing well. A thriving business makes it easier to secure better terms and a lower interest rate.
Alternatively, if you wait until your business is stressed and you need the money, you’re more likely to go for convenient, short-term solutions that usually come at a higher cost.
What smart borrowing strategies will you try?
When it comes to financing your business, it pays to compare your options. Rather than jumping at the first opportunity, take time to evaluate your options and choose the financial tool that best supports your current objectives.
As you compare options, look beyond the interest rate to understand the full cost of borrowing, and consider low-rate options to keep costs down.
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