Entrepreneurs’ Guide to Financing and Accounting for Small Businesses

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 fund your business yourself: put your head down, use your personal savings, and invest all the cash generated from your first sales, and after some hard work, you will succeed.

The second school is more traditional: go to a big bank, put your home up for collateral, and if you have a good credit history, you will get a decent loan at a high interest rate.

Both strategies are reasonable, but there are other ways to fund 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 for Your Business

Initially, we will talk about the financing options available to you. Then, we will look at how to manage small business finances once you have money in the bank.

Small Business Loans

Small business loans are one of the most common types of loans for small businesses, where a bank loan is repaid in fixed amounts at regular intervals over a set period of time. Small business loans are defined by a fixed or variable interest rate. These loans may require a substantial down payment to reduce the loan payments and total loan costs.

Small business owners with a good credit rating and two years of operation typically choose term loans. They use term loans to purchase assets (such as equipment) or invest in growth, rather than using them to cover everyday expenses.

Term loans come with some features that set them apart from other financing options: lower interest rates, flexibility in using the funds, and a predictable repayment schedule.

They also come in three different loan options, each serving a different purpose for your business:

• Short-term loans (repaid within one year). Business owners 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 seasonal inventory, take advantage of a stock deal, or cover payroll if you’re facing cash shortages.
• Medium-term loans (repaid between one and five years). These loans are good for larger projects, such as purchasing equipment or refinancing old business debts. You should use these loans for projects that may take several months or years to yield a return on your investment.
• Long-term loans (repaid between six and twenty-six years). Long-term loans target growth opportunities, such as purchasing a new building or acquiring heavy manufacturing equipment. They are secured by your business’s guarantee or existing assets. These loans usually come with strict rules about what you can and cannot do with the money.

The application process with traditional banks can be inflexible and opaque. This is why Shopify offers quick and simple financing for merchants. Through Shopify Capital, merchants can receive funding within days of approval. Once merchants accept and approve the offer, the funds are deposited within two days, and loans can be repaid as soon as sales are made. You can use the loan to fund payroll, inventory, marketing campaigns, or other things that can support the growth of your business.

The best part? You can avoid lengthy applications with fixed paperwork and no credit checks. By financing through Shopify Capital, you can get the financial support you need quickly and easily.

Merchant Cash Advances

This is a cash amount you can access for a fixed fee. In this model, the funder buys a percentage of your future sales, then collects a percentage of sales daily by withholding a portion from credit or debit card sales. Since sales can be high on some days and low on others, there is no set repayment time.

Offers

Shopify Capital provides funding for small businesses in the form of cash liquidity for eligible merchants in the UK.

Equipment Financing

At some point in your business, you will likely need to purchase, upgrade, or replace various pieces of equipment. This is where equipment loans come in.

Equipment financing is a type of small loan designed to help you buy the equipment necessary 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 around 80% of the total price of the item. Typically, a down payment of 20% is required for a small business equipment loan. You will own the equipment from day one.

Lines of Credit

Adapting to change is part of managing a small business on a regular basis. Sometimes, if there is a growth opportunity you wish to take advantage of, you may need to access cash quickly, and with flexible monthly payment terms, like small loans, unsecured lines of credit can be a great solution.

Think of a small 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 isn’t a fixed amount (meaning you won’t receive all the cash at once) when opening a line of credit. Instead of being forced to use a certain amount, you can borrow only what you need, helping you manage your business’s cash flow better. In many cases, this saves you from paying interest on funds you don’t actually need.

Like a credit card, once you withdraw cash from your line of credit, interest begins to accrue. The amount you can spend is based on the credit available to you. As you repay the borrowed amount, your credit balance increases. The lender will set a limit on the amount 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 lend money to borrowers. It sets guidelines for small business loans made by its partners. The SBA helps small business owners who face challenges in getting approved for other loan programs.

For example, if a bank considers your business a high risk for granting a cash loan due to poor credit history, the SBA can guarantee the loan. This reduces the bank’s risk and makes it more willing to offer a business loan. Small business loans can be used to meet most business needs and vary in amount. These loans generally have more flexible terms and are more accessible to a wide range of credit types.

Do you want to get a loan from the SBA? Learn more about eligibility requirements on the U.S. Small Business Administration website.

Alternative Financing Options

Many lenders may require you to provide collateral or personal guarantees to approve financing. Collateral refers to assets that can secure your loan repayment, such as your home or other high-value properties.

If you fail to repay your loan, the bank will reclaim the property as compensation. This is the common lending process, but it is not the only way.

Alternative financing options include:

• Friends and family
• Capital investors
• Crowdfunding
• Investing in your business

Business owners often turn to friends and family for funding when starting a new venture. They may raise money from them before formalizing a business plan or obtaining proof of value. This funding can help cover initial inventory orders or early product development.

Becoming

The method of friends and family is less formal than obtaining a bank loan or raising capital investment. Some may be willing to put money into your business without interest. This will allow you to retain full control over your business.

There are two main types of investments from friends and family: equity financing and business loans. In equity financing, you give investors a stake in your capital. As your capital grows, their investment grows. In business loans, you promise to repay investors with interest over a specified period or when you reach a certain profitable point.

Capital investors come in the form of venture capitalists or venture capital funds. These accredited investors provide funding for small startups or early-stage companies. In exchange for their investments, these investors receive an ownership stake or convertible debt, which is a loan that can be converted into equity at a later date.

Loan amounts can range from $5,000 to over a million dollars, depending on the ownership ratio and the size of the company. This type of funding is usually reserved for high-growth startups with significant potential. You may see this model sometimes when investing in commercial real estate.

Crowdfunding refers to raising small amounts of money from a large number of people, in exchange for specific rewards. It is similar to friends and family and equity investments, but crowdfunding raises capital from the public.

Platforms like Kickstarter, Indiegogo, and GoFundMe have grown in popularity in recent years. These sites help people raise funds for new businesses, products, nonprofit organizations, or charitable causes. There is no upward barrier to starting a crowdfunding campaign. A side benefit of crowdfunding is that it helps attract a new audience for your e-business that you may not reach through other means.

Another option for funding your business is investing your own money in it. Many entrepreneurs invest their early profits into marketing and advertising campaigns, without taking any salary for themselves. There is some math behind this strategy. So if you are interested in it, read “Investing in Your Business: What You Need to Know Before You Start.”

How to Manage Your Small Business Finances

There is a familiar saying: “Give a man a fish and he will eat for a day. Teach a man to fish and you will feed him for a lifetime.” But what if this man has no idea what to do with the fish once he catches it? This is where mastering small business management comes into play.

When you understand how money works in small businesses, you will know what to do with money – meaning all the money you earn and spend. This means more than just starting a low-investment business. It means that knowing how to properly handle your business’s money gives your business a chance to survive and grow.

Separating Your Personal and Business Finances

The first thing to do for the financial well-being of your business is to separate your finances. Separating your personal finances from your business finances offers several advantages, ranging from simplifying your accounting to protecting your personal property and other assets.

Separating your finances has other benefits as well. Your business bank account is separate from your personal account, making it easier to determine whether lunch on Wednesday was with a client or a friend when personal and business receipts are not mixed together. Even if you can easily distinguish one set of expenses from another, sorting through a pile of papers during tax season wastes precious time and costs you a lot of money to pay a professional accountant to do it for you.

When
Your small business is starting to grow, and you may want to consider investing. This means that if your company encounters a financial or legal problem, your personal assets, such as your home or your children’s college fund, are protected in most cases.

It’s important to know when to invest. If you have converted your business into a legal entity between
Source: https://shopify.com/blog/small-business-finance