How to Consider Choosing Business Financing Options for Your Company
It’s always important to consider the different types of options you have as a business owner. Whether it’s financing tools such as accounts receivable factoring, a business line of credit, purchase order financing, inventory financing, supply chain financing, debt financing, equity financing, and more, there is plenty of flexibility within each one. However, considering the regulations, guidelines, and qualifications of financing options is essential no matter which you decide. Utilizing financing tools may be unavoidable because at some point or another, your business will need insertion of fresh capital in order to sustain itself in the long term. This could be used to expand business operations, invest in a new business opportunity, or provide extra funding for an on-going project.
Each financing tool consists of repayment terms, interest and fee rates, lending requirements, or more. For example, if you’re a seasonal business and have large stocks of inventory in a slow season, but not enough cash flow to generate payroll for the month, it would be smart to consider possibly using Inventory Financing, using your inventory as collateral to open up a line of credit, freeing up capital to use elsewhere in the business. This is just one example out of many where quick, accessible, and flexible financing options would help your business. The source of this capital is also equally important and can have a long-term impact on the liquidity and solvency of your business. Choosing the right financing tool for your business is, therefore, vital.
Let’s look at a few of the things you should consider before choosing a financing option:
Financial Position of the CompanyOne of the first things to consider is your company’s recent financial performance.
This includes analyzing the inventory turnover rate, asset turnover rate, operating profit, gross profit, and net profit. You must also observe the current financial risk being taken on by the company. This will help you determine the overall risk appetite of the company and help you choose the most beneficial financing option.
Impact on Cash Flows
Financing options provide a cost advantage to the company, but it will also leave an impact on your cash flows. Taking on a financing tool means you are now obliged to make regular payments according to the terms of the agreement and must also account for interest. For example, if your business generates a sufficient amount of cash, then you can consider opting for debt financing. Debt financing is used when a firm raises cash for working capital by selling bonds, notes, or bills to investors or business owners. In exchange, investors or business owners pledge to repay the principal balance and interest on the debt. The purpose of the capital becomes very important in this regard. If you are going to use the funds to invest in a project with a high rate of return, then debt financing is a good choice since it will be easier to make payments.
The structure of the financing arrangement is also important. The first thing you need to consider is the repayment terms. These include frequency of payments, amount of periodic payments, and the amount of interest charged. Loans having a higher allocation on the principal amount will cost you less in the long term. You must also take into account the origination fees and broker’s fees.
The Bottom Line
Choosing the right financing tool for your business requires proper planning and long-term focus. When considering different financing options, most businesses will think along the lines of a bank loan. However, with new financing tools emerging, businesses can access more flexible options. If you would like further insight into additional information or guidance, consider reaching out to a representative at a commercial bank or a private lender.