Utilizing Financing as a Small Business Owner
By Tyler Heap
If you own a small to mid-size business, you likely have or will need to obtain capital through business financing. Using business financing is a typical milestone for most small businesses (43% of small businesses applied for a loan in 2020).
Knowing how and when to access financing is essential to growth. Unless your balance sheet matches that of a Fortune 500 company, you’ll need a loan to expand operations, whether that involves hiring more staff, purchasing more inventory or selling to more clients. Development means new challenges, unexpected obstacles and plenty of complicated problems to solve — and you can do it with help from a quality lender.
Taking money from the wrong source, for the wrong reasons or at the wrong time has consequences — losing part of the company or being trapped by repayment terms that stifle future business growth.
To guide you on the financial journey, here is an outline for leveraging financing effectively, so your company can prepare for the future.
Objectives
When making and evaluating financing decisions, deliberately consider your business objectives by answering the following questions:
- What are the business objectives and goals?
- What is the purpose of the funding? Will it be used toward the outlined objectives? Some answers include more inventory, scaling, smoothing out seasonality or cash flow and acquiring new business.
- What is the timetable for utilizing the funds?
Resources
It’s crucial to examine the collateral the company has to leverage. Consider how many accounts receivable invoices the company has and what business assets the company owns.
Challenges
One of the highlights of entrepreneurship is that no two days are alike, each offering a new challenge. With this in mind, realize that your business will face unforeseen obstacles that impact business objectives. Evaluate liabilities or areas where the company may have snags such as delays, increases in costs or economic factors such as rising inflation or a pandemic.
Preparing business objectives, resources and challenges before obtaining financing will help in working with a financing partner. That right partner will advise which financing option is best, maximize the value of financing and mitigate potential problems.
Now, let’s take a look at some financing options: Accounts receivable financing and
Asset-based lending.
Accounts receivable financing (factoring)
Accounts receivable (A/R) financing — also known as factoring — leverages unpaid accounts receivable invoices as collateral for a revolving line of credit. Companies receive payments — in as little as 24 hours — worth the majority of the invoice value. The financing partner then owns the receivables and collects on them, so payment deadlines and collections are seamless. Leveraging A/R financing shortens the timeframe for receiving payments, and this kind of financing accesses money already owed for a small fee.
A/R financing is valuable when customers’ pay schedules are longer than average. Companies can choose which invoices they want to use as collateral, so it’s flexible to cash flow needs. A/R financing is excellent for evening out cash flow, decreasing working capital issues or funding a larger project in the short term.
Asset-based lending
If flexibility is a priority, asset-based lending may be the solution. Asset-based lending offers more latitude than the standard business loan because companies can leverage various business assets to fund the company’s initiatives. Assets for collateral could include accounts receivable, inventory or equipment. Loans using tangible assets as collateral typically receive lower interest rates than unsecured loans, making the ROI on a loan easier to achieve.
Financing partner
When securing financing, choose a partner who knows your particular industry and has worked with and provided loans to your peers. This experience is key to understanding your company’s unique challenges.
The lender should design a tailored solution to your business’s operations — scaling up or down as needs change. Lenders may advise changing loan types as the company’s situation changes.
Consider banks or lending providers that offer the following:
- Customized solutions and personalized setup
- Competitive rates
- Funding timelines
- Dependable customer service and support
- Reliability to help company executives make decisions.
Financing allows companies to expand their reach and potential, achieve their goals and prosper. Choosing the right partner can make all the difference, using the financing experience as a necessary stepping stone to future opportunities.
Tyler Heap is chief credit officer at TAB Bank. He is responsible for leading the underwriting, special assets, and collateral monitoring teams in conjunction with managing overall credit quality at the bank.
