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Financing Basics Every Business Owner Needs to Know

Money. Money. Money. Without it, your business does not exist. And what you don’t know about money can definitely hurt you when it comes to your enterprise. 

Whether or not you got into business purely for the financial upside or not isn’t the issue. Even with more noble aims—not that the acquisition and growth of money isn’t noble in itself—no business can survive without an unfettered flow of money.

Knowing the numbers of your business is important, of course. But understanding business financing may be even more important. Why?

At some point, your business may want to grow, and financing (which infuses more money into your business) may be the way to do so.

Sometimes your business’s survival may even depend on it.

Business owners that only believe in bootstrapping (that’s where you only acquire things or make investments with the cash you have on hand) may be short-changing their company’s growth by not considering financing. So the first thing to understand about business financing is…

  • Business financing gives your business options that your current profit does not.
    If you feel like your business is hitting a glass ceiling that you can’t break through, it may be your attitude toward money. Sure, working simply out of profit feels like a less risky way to do business sometimes. But usually the long-term cost of not growing more aggressively can mean a precipitous decline for your business in the near future. Sometimes not opting for financing can mean not being able to afford the talent or equipment you need to take your company to the next level.

    True story: One business owner started a company that seven years later gave him a $4 million exit. He never borrowed money for that business. The entire seven years was spent bootstrapping. With his next company, his team of advisors told him it would actually be hard for him to have a more successful exit without infusing more cash into his business. After two rounds of 7-figure funding, he was able to grow the value of his new business to more than $15 million in less than two years.

    And if you decide that business financing is for you, then you are NOT alone. According to fundera.com, 43% of small businesses applied for a loan last year.

     

  • Knowing the different types of business financing, and choosing the right type for your business, is essential.

    Long-term business loans (6—30 years) – These common business loans are provided by lenders to businesses. Long-term business loans require repayment of the principal with interest and fees added to it. These business loans normally require regular payments on a set schedule, but repayment terms and interest rates can vary.

    An example of long-term business loans include those backed by the Small Business Administration (or SBA). The SBA works with private lenders but “guarantees” the loan repayment. This usually gets the borrower a lower interest rate and longer repayment period. The downside to this type of financing can be the paperwork required to apply and the time it takes to be approved.

    Some business owners borrow from their real estate assets. Equity loans and Home Equity Lines of Credit (or HELOC) are a couple of ways to “mortgage” your personal future for the sake of your business. The downside here is the additional personal debt you’ve added. Your debt-to-income ratio can affect your credit score and future personal purchases.

    Short/normal-term business loans (5 months—3 years) – A short-term business loan is intended to be paid off much faster than a regular business loan. Some common types of short-term business loans include merchant cash advances and invoice financing. Commercial equipment and working capital equipment upgrades are another reason for short/normal-term loans. One alternative to borrowing money for a commercial equipment loan is equipment leasing. This will increase your operating expenses but mean less debt for your business.

    A personal guarantee (PG) means you agree to put up personal assets as collateral to guarantee the solvency of the business loan. A bank will be more willing to loan you money if you have a personal guarantee.


Borrowing from friends and family – Unlike the previously mentioned forms of business financing, this kind of funding is less formal and has a different set of drawbacks. Usually reserved for business owners whose businesses can’t qualify for traditional loans, this relationship-oriented business financing can create more unintended consequences and scenarios that make it harder to sustain your business.

 

  • Financing your business is not the same as getting an investor. When you borrow money to fund your business, whether you get a guaranteed or non-guaranteed loan, you aren’t giving up any ownership in your company. The exact opposite is true when you ask someone to invest in your company. The money may look the same, but you’re usually giving up equity to get that money. And if the money you’re asking someone to invest in your business causes you to give up more than 50% equity, you are giving up control of your business to that investor. There may come a time in the life of your business in which you are willing to take on a majority partner or equity ownership, especially when you are looking to exit the business. But if it’s funding you’re looking for, business financing is the more conventional way to go. It’s true that you can often get a lot more money when you ask a firm to invest than if you just get a straight up loan… but the baggage involved with an investor may not be what you’re looking for.

     

    1. There are personal ways to fund your business. A friend of mine was once looking to buy the business he had served as a consultant for little over a year. He’d seen growth and the potential for more growth over that time. The owner wanted a steep price however… plus there were the first month’s expenses which were more than the prospective buyer had in the bank at the time. The owner’s suggestion: Use your personal retirement savings to buy the company. Of course, most 401K programs allow you to take a taxable distribution a limited number of times. Some 401K plans even allow for a loan, but only a certain amount—or percentage—of what’s in your account. Be careful with this option however… The downside of taking a distribution from your retirement plan is you are taking out funds that are growing in a tax-advantaged way.

       

  • Be prepared when it comes to applying for a business loan. Different lenders have different documentation requirements when it comes to your business loan application. Sometimes the number of documents required could increase with the loan amount you’re applying for. At Envision Finance:
  • We typically ask for 3 months worth of business bank statements (personal bank statements will do if no separate business account exists), an Invoice/quote for your product or services, and your story. By story we mean what you do, where you started, where you plan to take the business, and where this transaction fits into that plan. 
  • For start-ups or people asking for large amounts (typically $100,000 or more) we require a Personal Financial Statement (PFS), Tax Returns (typically 2 years personal and business), and a Business Plan (typically only start-ups), and Current Interims (or current year-to-date financial statements). 

 

Next Steps?

So you’re ready to look at financing for your business but you aren’t sure of the right next step? 

Let us help you.

Envision Finance Corporation looks beyond the transaction and focuses on building partnerships to ensure success and longevity with everyone. Envision Finance Corporation is a Veteran owned and operated, group of passionate individuals devoted to finding small, medium, and large businesses’ financing for equipment and working capital. With Envision, you’ll find transparency and integrity, and benefit from knowledgeable and efficient processes to get your business the capital it needs to grow and thrive.

Envision works with funding sources across the nation and vendors in virtually every industry. We find solutions for your financing needs. No one works harder for you than we do.

Contact us today using this form. We will get back to you!

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