How to Finance your Business

Comments (1) Posted By Joe on March 14, 2012 in Business Basics

Photo: Flickr/401k

What’s the best way to finance your new business?

When I ask this question in front of a crowd, I get answers like “credit,” “loans,” “investors,” and “family.”

Good guesses, but they are all wrong.

The best way to finance your business is with your own, hard-earned, saved-up cash. Think about it: why owe money to someone else, pay interest or sell off a portion of your business if you don’t have to? Why wait for a lender or investor to deem your business viable before getting it started?

If you have the money to fund your business in its early stages, you should abstain from loans or offers from investors.

Can limiting yourself to currently available funds impede your business’s growth? Perhaps, but it will also reduce your risk considerably. And there’s no reason you can’t invest the profits that you earn back into the business, building a war chest that will eventually fund necessary expansion.

Having said all of that, it’s worth noting that many of us lack the funds to pay for the major purchases that launching a business can require. Also, business owners often reach a point at which an immediate equipment investment could quickly grow their sales. In cases like these, seeking a business loan is a valid move, albeit an imperfect one.

If you find yourself on the hunt for a business loan, you should consider a couple of guidelines: certain expenses are better to finance than others, and there are times when a loan can do more harm than good.

The best expenses to finance are those that pay for an asset – like a commercial freezer, a truck, or a hot dog cart – that has resale value. If you borrow money for an asset but your business ends up suffering, you can sell the asset and repay your loan (or a portion of it, at least). Because loans like these are safer, lenders are far more willing to make them.

A loan for an asset carries much less risk than a loan for something like rent, payroll expenses or utility bills. The money you spend on recurring costs like these leaves your business forever: you can’t very well ask a former employee to give back six months of wages after your business has tanked.

Loans for recurring costs are unwise as well as risky. If you are unable to afford your rent, payroll costs or other regular bills, there’s something wrong in your business that a loan cannot fix.

Debt that merely masks structural business problems does more harm than good.

We can say the same for debt whose payments aggravate an already distressed financial situation: if your housing costs consume more than half your income, you need no more debt. If you have failed to make your rent or mortgage payments on time during the last 12 months, you should avoid taking on more payments. If you are behind on child support payments or you have no significant source of income, borrowing money is the last thing you need to do.

Loans can clear the way for your business to thrive or they can choke your new venture to death. Feel free to get in touch if you’re unsure about what they could do to – or for – your business.

1 Comment »

  1. posts@ephesus.scholastica” rel=”nofollow”>.…

    tnx for info!…

    Trackback by armando — July 29, 2014 @ 6:16 pm

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