See also: Pitching Your Business Idea
Understanding Business Financing
Management is a difficult role in a business to fully understand. On the one hand, some aspects of management cannot be taught. There are some people who are simply not cut out to be managers. If you hate dealing with other people, you are not going to be a good manager. On the other hand, there is a lot that absolutely must be taught. Without knowing about certain subjects, you will fail at management no matter how good your people skills may be.
Business financing is one of these subjects. As a manager, you do not necessarily need to deal directly with financing. The nitty-gritty is the job of a Chief Financial Officer (CFO). They will look for various options, calculate the pros and cons of each, and come to what they believe to be the best decision.
However, their decision should then be scrutinised in context. They may have come to their conclusions in relative isolation. Their job is to look at figures more than at the bigger picture. Big picture thinking is your job as a manager.
Making the wrong decision when it comes to small business finance can end up leading to major issues down the line. It could hinder the profitability of your company, or even lead to bankruptcy.
To start learning about the subject, check out SmallBusinessLoansAustralia, covering every means of business financing and highlighting the differences. No matter what kind of business you plan on running, you should know about all the options available.
For an overview of the main kinds of financing, read on.
Asset or Equipment Financing
No matter what the context, secured loans should always be your first consideration. When it comes to business financing, this usually means getting a small business loan to buy an asset or expensive equipment. When you finance an asset or equipment, you will be getting a secured loan. The assets you are buying act as security that the lender can repossess if you fail to pay.
Secured loans come with the best possible terms and low interest rates, which is why they are so sought after. You can get excellent secured bank loans for a small business, where regulation is necessarily tighter than that of private lenders.
This is not to say that the bank will always be a better option. Look for the best rates possible, no matter the source. However, do your research into the private lender before accepting their financing. If what they offer seems too good to be true, whether for asset or equipment financing, it usually is. They may write unfavourable terms into the loan agreement, leading to costly repayment over the years.
The reality is that many modern businesses do not need financing for concrete assets or equipment. Unless you are in the construction industry or are manufacturing products, you are likely working in a digital space. This may mean you do not even have centralised offices, preferring a remote working environment. Your expenses are mostly related to paying staff and contractors, buying software, and other intangible needs.
Therefore, unless you already own an asset or have someone who will serve as a guarantor, you will need to get an unsecured loan. Unsecured lending is considered high risk by financial institutions, and you may not be able to get a loan from your bank. Instead, you will turn to private lenders, who will offer you loans with high interest rates.
This is where you need to be particularly careful. There are some excellent private lenders providing financing to small businesses around the world. However, there are also predatory lenders who will use unscrupulous practices to get you to pay far more for a loan than it is worth. Because you do not have security for this loan, you will already be struggling to get financing, and they try to take advantage of your lack of options.
Before you agree to an unsecured loan, get your financial team to calculate exactly how much it will cost you and how it can fit into a budget. They will be able to tell you how much you are risking by taking out this loan. Sometimes, starting from scratch and looking for alternatives is better than getting financing that is most likely to bankrupt your business.
Credit Card or Business Line of Credit
A business line of credit is an alternative means of financing your business that works similarly to a small business credit card. The lender makes a certain amount of money available to you. However, you only start accruing interest and paying back the loan when you start using the money. Instead of paying for the entire amount available, you only pay for what you use.
As with other unsecured forms of financing, a business line of credit will come with a high interest rate. The only difference is that you are giving yourself the option of using this funding when necessary, rather than committing to a loan that will cost you the full amount.
A business line of credit is becoming increasingly popular as an offering from private lenders around the world. You should be careful when agreeing to a business line of credit. Even if you do not end up using it, there may be administrative expenses. Furthermore, while you may have no intention to use the full amount unless absolutely necessary, easy access will make its use difficult to avoid.
Business Financing as a Manager
Management is more about delegation than carrying out specific jobs yourself. Finding out which forms of financing are available and doing the research into the lenders is going to be the job of your team. But you should have an understanding of what is available and the ways in which different sources of funding will impact your business. This way, you can make an informed decision from a big picture perspective.
Ultimately, you will have to trust the people you manage, but they will have more faith in you if you show an understanding of what they are talking about. Management is a balancing act, and the best managers do more than simply delegate.