For most small business owners, there are already way too many things on their plate. Keeping track of payroll, keeping your employees happy, and taking care of your current customers is already a handful in itself. Sometimes it can be hard for a business owner to pay any attention to their financing needs. Small business finance is one of the most overlooked areas of a small business. Most of the time, business owners are concerned with just taking care of existing customers and employees that they don't take the time to learn about all the options that are out there to make their business run smoother. They often will opt for the path that is the quickest for them to pick and then move onto the next thing. We've outlined some very quick tips on different financing options that every owner should know about, this will give you just enough to be dangerous.
Most people are familiar with home equity lines of credit, and a business line of credit is pretty much the same thing. It's used to pay for short term expenses that are incurred by your business. So for example, if you have Accounts Receivable that you were waiting on from one of your customers any you needed to make payroll that week. You would simply borrow on your line of credit to pay payroll. It helps you maintain a good working relationship with your customers because you aren't calling them on the days leading up to payroll and it also keeps your workers happy tha they are getting a paycheck this week. When the check from your customer comes in a week or ten days later, then you simply pay back the RLOC and then you pocket the profit. The purposes to bridge any cash flow gaps from when you pay out money to when you receive the money. Another typical use for the RLOC is when a certain supplier gives big breaks on purchasing inventory in bulk. Or if you can purchase offseason for big discounts and then store the inventory for yourself. In this situation you would borrow on your line of credit in order to purchase the inventory and then once that inventory is liquidated and you've collected your Accounts Receivable, that you would pay back your line of credit. A lot of small business owners misuse lines of credit by using them to purchase equipment. Really, the line must be used only for easing the pain of the short term cash crunch. Using a RLOC correctly is something that can really help grow your business. There are a lot of growing pains involved with growing a company and a LOC can certainly help easy those pains.
As your company grows one thing most small business owners want to invest in is their own building. A commercial building is a great way to do that. This can help you diversify your business and invest in an asset that will continue to pay long after you've retired. In most cases this will be the biggest purchase of somebody so getting a good deal is important. The most common terms for acommercial mortgage is a five-year fixed-rate loan that is amortized 20 years. As bank competition has increased and banks are buying market share, you should be able to get more aggressive terms than you were able to even 5 years ago. Most banks in competitive environments are willing to extend the amortization up to twenty-five years and give you a fixed rate term of possible up to 15 years. There are even some government options where you can put less down than a bank will typically require. This is a great option if this is going hold onto the building for more than 10 years, because there are significant prepayment penalties. The way banks will price these loans is usually some kind of spread over the treasury. An example would be aon a ten-year note, you can generally guess that your loan would be priced at 2-2.75% over the 10 year treasury. Banks or lending institutions will always try to make their money somewhere and its typically in points and fees. It's not uncommon for them to propose for these things, but you can usually get out of paying them if you are a good enough customer and plan to bring enough business to the bank.
Small business startup loans are something that most business owners need at some point and also something that banks generally aren't too excited about. That's why I always recommend going through alternative channels in order to get the funding that you need. This typically includes asking friends and family for a loan or borrowing on a HELOC. Typically, since you have no track record and no collateral the bank will request to use your home as collateral for the loan, so the easiest thing to do is to utilize the streamlined process that banks have in place for HELOCs. This will be far easier and you'll end up paying a lot less in the long run. Home equity loans typically have a lower rate, more flexible terms, and a quicker approval process. The one objection that most business owners have to doing a HELOC is that they want to build up business credit. Unlike the personal side, there is no such thing as building business credit. Banks look at companies financial statements when making loans and that's it. If you can repay the loan based off your companies history than that's all they want to see. So, a HELOC is a great option to get you off the ground right away and ready to go. It should be noted that this doesn't mean that you still don't do the necessary business projections and businesss plan. Those are important things that every business should use when planning their business.
Nobody likes to add another task to their already busy day, but this is something that can seriously help grow your business and save you money by paying attention to it. In addition to bank loans are also SBA loans that can be used if your business doesn't quite fit the qualifications that the bank is looking for. A lot of small business owners are weary of using the bank's money to grow their business, it's really something that all fast growing companies have employed at some point. Proper utilization of capital at the right time is essential to taking your company from a small business to a large on in short order.