Small business finance – weighing up the options
As a small business owner, you’re probably keen to help your business grow and become more profitable. That can mean investing in new equipment to increase capacity, boost productivity or explore new product lines. This often calls for an injection of new funds, but whether you plan to tap into cash flow, or borrow to source that extra capital, it’s critical to weigh up all the different options before diving in. Not every financing option suits every business need, and you need to compare the pros and cons of each to make an informed decision.
It can, for instance, seem like an easy option to approach your transactional bank about a secured loan. However, it’s worth taking the time to look further afield. OnDeck’s research shows that as many as one in four small businesses can be knocked back for a bank loan. Even among those that do qualify, a slow application and approval process can mean missing out on opportunities to secure discounts on new equipment or trading stock.
It’s also important to consider your business’s long and short term needs. This helps you plan your working capital requirements in advance. While you may be keen to invest in new business equipment today, it’s a fair bet that your business will face additional capital needs further down the line. These could relate to purchasing a new premises or increasing your headcount as your business grows. Bear in mind too, there is always potential for unexpected business costs – and conversely, fresh opportunities to arise. By looking ahead you can ensure you have access to the capital you need – when it’s needed.
While it’s difficult to anticipate every future capital need, here are our tips to better evaluate your financing needs:
Balance the need with the type of capital
Identifying what it is that your business needs capital for can help you choose the best financing option for your business. If you plan to purchase trading stock, it doesn’t make financial sense to take out a loan that you could be paying off months after the inventory has been sold. On the flipside, if you plan to invest in a new piece of plant or equipment, there are good reasons to use finance with a term that closely matches the working life of the asset.
Understand the true cost of capital
Regardless of which lender you use, there are always costs associated with borrowing. If you’re applying for a loan it’s important to do your research as some lenders have application fees, while other lenders, like OnDeck, do not. Understanding the true cost of capital lets you work out the expected return on your investment, and this can shape decisions around whether the purchase is worthwhile based on the contribution it will make to your business.
Keep tabs on your credit profile
Just like people, businesses also have a credit score. Familiarising yourself with your business credit score provides insights into the financial health of your business. You can check your business credit score for free with OnDeck’s online Know Your Score tool. Keeping tabs on your score, and maintaining a healthy business credit score and profile can help improve the likelihood of receiving the funding your business needs.
Good record keeping goes hand in hand with good business management. It lets you know where your business stands at any point and gives you quick access to all the information that’s needed when you’re ready to apply for finance. Familiarise yourself with your profit and loss, business bank statements, income and expenses. Remember though, not all lenders require the same sort of information to make a decision. While some banks may require mountains of paperwork, OnDeck only requires three recent months of bank statements to start an application.
How you finance your business is an important decision. Taking the time to evaluate all your options will help you understand which is best suited to your needs.
Prepared by OnDeck Capital Australia Pty Ltd ABN 28 603 753 215 (“OnDeck”) for general information purposes only. Content may belong to or have originated from third parties and OnDeck takes no responsibility for the accuracy, validity, reliability or completeness of any information. Information current as at October 2020. You should not rely upon the material or information as a basis for making any business, financial or any other decisions. Loans issued in Australia are subject to the terms of a loan agreement issued by OnDeck. Loans are subject to lender approval. OnDeck® is a Registered Trademark. All rights reserved.