Introduction
When it comes to the financial aspects of managing a business, most small business advice falls into two schools of thought.
The first school encourages you to finance your business yourself: keep your head down, deplete your personal savings, invest all the cash from your first sales, and with some hard work, you’ll succeed.
The other school is more traditional: go to a big bank, put your home up for collateral, and if you have a good credit history, you’ll get a good loan at a high interest rate.
Both strategies are reasonable, but there are other ways to finance small businesses.
In this article, we will discuss business loans and money management, along with everything you need to know about small business financing.
Financing Options
Initially, we’ll talk about the financing options available to you. Then, we will look at how to manage small business management once you have the money in the bank.
Small Business Loans
Small business loans are one of the most common types of loans for small businesses, where the loan amount is set at a fixed amount to be repaid in regular installments over a specified period of time. Small business loans are offered at either a fixed or variable interest rate. These loans may require a significant down payment to reduce loan payments and total loan costs.
Typically, established small business entrepreneurs who have been in business for about two years usually choose term loans. They use term loans to purchase assets (such as equipment) or growth investments, rather than to cover everyday expenses.
Term loans have some characteristics that distinguish them from other financing options: lower interest rates, flexibility in using the funds, and predictable payment scheduling.
They also come in three different loan options, each serving a different purpose for your business:
- Short-term loans (to be repaid within a year). Entrepreneurs choose these loans over cash flow loans because they have lower interest rates and are easier to obtain. You can use a short-term loan to purchase holiday inventory, take advantage of a stock deal, or cover payroll if you’re facing a cash shortfall.
- Medium-term loans (to be repaid between one and five years). These loans are good for larger projects such as buying equipment or refinancing old business debts. You will want to use these loans for projects that may take a few months or years to yield a return on your investment.
- Long-term loans (to be repaid between six and twenty-six years). Long-term loans target growth opportunities, such as purchasing a new building or buying heavy manufacturing equipment. They are backed by your company’s collateral or your existing assets. These loans typically come with strict rules about what you can and cannot do with the money.
The eligibility verification process at traditional banks can be complicated and opaque. That’s why Shopify offers quick and simple financing for merchants. Through Shopify Capital, merchants can receive funding within days of approval. Once merchants accept the offer and sign off, the funds are deposited within just two days, and loans can be repaid as sales are made. You can use the loan to finance payroll, inventory, marketing campaigns, or other things that can support your business growth.
The best part? You can avoid lengthy application processes with minimal paperwork and no credit checks. By financing through Shopify Capital, you can get the financial support you need quickly and easily.
Merchant Cash Advance
This is a cash amount you can receive for a fixed fee. In this model, the funder purchases a percentage of your future sales, then collects a portion of daily sales by holding back a percentage of your credit or debit card sales. Since sales can be high on some days and low on others, there is no specific time duration.
Shopify offers a similar solution designed to provide flexibility for merchants.
Shopify Capital provides funding for small businesses in the form of cash liquidity for eligible merchants in the United Kingdom.
Equipment Financing
Sometimes, your business may need to purchase, upgrade, or replace various pieces of equipment. This is where equipment loans come in.
Equipment financing is a type of small business loan designed to help you buy the equipment for your business. These loans can cover a wide range of items, including office furniture, commercial ovens, medical equipment, computers, heavy manufacturing equipment, and more.
Each lender will have different terms. But generally, you can finance about 80% of the total price of the item. A down payment of 20% is usually required to secure a small business equipment loan. You will own the equipment from day one.
Lines of Credit
Adapting to change is a regular part of small business management. Sometimes, if there’s a growth opportunity you want to take advantage of, you may need to get cash quickly, with flexible monthly payment terms. Like small business loans, unsecured lines of credit can be a great solution.
Think of a small business line of credit as more of a credit card than a loan. It gives you access to funds that you can use to meet any business needs that arise. There’s no fixed amount of money (which means you won’t receive all the cash at once) when you open a line of credit. Instead of needing to draw a fixed amount of money, you can use only what you need, helping you manage your business finances better. In many cases, this helps you avoid paying interest on funds you don’t really need.
Similar to a credit card, once you take money from your line of credit, interest begins to accrue. The amount you can spend depends on your available credit. With each repayment of the drawn funds, your balance increases. The lender will set a limit on how much you can borrow.
Small Business Administration (SBA) Loans
The Small Business Administration (SBA) partners with lenders to provide small business loans to small business owners. The SBA does not directly provide loans to borrowers. It sets the guidelines for small business loans that are made through its partners. The SBA helps small business owners who are struggling to get approved for other loan programs.
For instance, if a bank thinks your business is too much of a risk to grant a loan due to poor credit history, the SBA can guarantee the loan. The bank has less risk and is more willing to issue the business loan. SBA loans can be used to meet most business needs and vary in amount. Small business loans generally have more favorable terms and are more accessible to a wide range of credit types.
Interested in getting a loan from the SBA? Learn more about the eligibility requirements on the US Small Business Administration website.
Alternative Financing Options
Many lenders may require you to provide collateral or a personal guarantee to get approved for financing. The term “collateral” refers to assets that can guarantee you will repay the loan, such as your home or other valuable assets.
If you fail to repay your loan, the bank will reclaim the property as compensation. This is the common process in lending, but it is not the only way.
Alternative financing options include:
- Friends and family
- Venture capitalists
- Crowdfunding
- Investing in your business
Business owners often turn to friends and family for funding when starting a new project. They may raise funds from them before preparing a business plan or proving value. The money can help finance initial orders for inventory or early product development.
The method
the money is separated, it’s easier to assess the profitability of your business. It also helps in creating a clear financial identity for your company, which is essential when applying for loans or attracting investors.
Additionally, maintaining separate accounts allows you to maintain greater control over your finances and make informed decisions based on accurate data. This separation becomes particularly beneficial during tax season, as it reduces confusion and potential errors in reporting income or expenses.
إنشاء ميزانية تتناسب مع أهدافك
Creating a budget that aligns with your business goals is crucial for financial management. A well-structured budget helps you plan for future expenses, allocate resources effectively, and identify areas where you can cut costs. Start by estimating your income and then outline your fixed and variable expenses. Don’t forget to include unexpected costs and set aside funds for future investments.
Once you have a budget in place, it’s essential to monitor it regularly. Compare your actual spending against your budget to identify discrepancies and adjust as necessary. This practice not only keeps your finances on track but also ensures that you are making progress towards your business objectives.
تتبع النفقات بدقة
Accurate expense tracking is vital for understanding where your money goes and identifying potential savings. Use expense tracking software or apps to streamline this process and ensure that you document every transaction. Review your expenses periodically to look for trends or areas where you can reduce costs.
Consider categorizing your expenses to make it easier to analyze your spending habits. This practice will help you make more informed decisions about your business strategy and areas that might require additional investment.
إنشاء بيانات مالية بسيطة
Creating clear and understandable financial statements is key to effective financial management. Essential documents include the balance sheet, income statement, and cash flow statement. These documents provide a comprehensive overview of your business’s financial health and are often required when securing loans or attracting investors.
Make sure your financial statements are easy to read and accurately reflect your business’s current standing. This transparency not only builds trust with stakeholders but also allows you to identify problems early and make necessary adjustments.
In summary, effectively managing your small business finances involves separating personal and business funds, creating a detailed budget, tracking expenses diligently, and maintaining clear financial statements. By implementing these practices, you can set your business up for success and achieve your financial goals.
Your small business is starting to grow, you may want to consider incorporation.
Source: https://www.shopify.com/blog/small-business-finance
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