Almost every business needs to resort to credit at some point and this does not necessarily demonstrate a financial health problem . It can be used to reorganize accounts or to finance business expansion, for example, or to meet a momentary need for working capital.
Whatever the reason, when taking small business funding, you need to look carefully at the lines of finance available. Because of compound interest, any minimum difference in interest rate has a large weight on the total amount you will have to pay.
In this article, we’ll show you some small business funding line options and explain how they work so that you have information to compare them.
Sources of Small Business Funding
Knowing the available alternatives for faster and safer funding is a valuable initiative for small businesses. However, care must be taken to choose the best option for maintaining the financial health of the business.
There are several options for companies that need to raise funds with different characteristics.
Overdraft
It is an option that should be used in exceptional situations when the entrepreneur is able to pay off the debt in the short term. This stance is essential for debt not to rise significantly due to high interest rates.
Financial Transaction Tax (FTT) and contract rate are other factors that make overdraft a very costly financing modality if payment for the borrowed money is not made quickly.
The indication is that the entrepreneur uses the overdraft for debts that can be paid in a few days. This should be done so as not to undermine the company’s ability to honor commitments and make new investments.
Guaranteed account
It works similarly to overdraft but typically has lower interest rates making it easier to pay. It is characterized by a revolving credit modality , which can be used for various purposes, such as equipment acquisition and purchase of raw materials.
To avoid problems with business finances, the business owner should negotiate the interest rate with the lending institution. The freedom to use money is an advantage that attracts entrepreneurs who choose this type of funding.
Leasing
It is considered a good medium- and long-term alternative, being widely used for the acquisition of equipment and vehicles.
Of course, the entrepreneur must carefully evaluate whether it is worth investing more money in the acquisition of the good. Depending on the situation, it is better to opt for more modern equipment if capital is available for it.
It should be noted that the asset used during leasing has already been depreciated and will have a shorter useful life than one that was manufactured less recently.
Loan
It is not always feasible to make large investments with own resources. It is therefore common for homeowners to make a loan to boost the business.
Credit unions and banks (commercial and investment) provide the entrepreneur with options to rely on the money needed to grow sustainably.
Before opting for the loan, it is recommended to analyze the interest rate and the grace period (time allowed by the financial institution to start paying the installments).
Smaller companies have lines of credit that allow them to use features for a variety of purposes, such as:
- Make renovations or improvements to the establishment
- Acquire vehicles that will be used for company actions
- Buy equipment
- Invest in the acquisition of a property
- Rely on working capital
- Hire technical assistance to check the best alternatives to expand production
- Invest in marketing to publicize the business.
Before taking out a loan, make a simulation of how the installments will be according to the deadline to repay them. This posture will help you make sure you can afford them on time.
Undoubtedly, common sense is a very important attitude for those who will get a loan.
The simulations allow you to plan how to repay the loan. The faster the entrepreneur pays the installments, the lower the interest expenses will be.
Receivables Anticipation
It is a widely used form of credit, especially in commerce. Imagine that a clothing store owner is in need of working capital. In this case, he can ask a financial institution for the upfront money for a sale.
It is a quick way to get financial resources that enable the payment of business expenses. Instead of receiving the money within 30 days, the entrepreneur already acquires it more quickly.
On the other hand, it is important to check the interest rate. This is because this type of financial transaction cannot significantly compromise the profitability of the business.
Why contract a loan from a credit union?
Have you ever considered financing for a credit union? Did you know that this alternative is being adopted by many entrepreneurs to start a new business and escape from the high interest rates adopted by banks?
A credit union is a financial institution that brings people together voluntarily.
This makes easier for members to obtain credit and other financial products, such as applications, investments, insurance, among others. The members receive a more targeted service, which helps to obtain more advantageous financing to run the business.
If you are afraid of making investments through a credit union, the recommendation is to know some advantages of investing money in this type of institution, such as:
- Personalized service focusing on the needs of members
- The excess resources of the cooperative are directed to members
- Credit is granted according to the characteristics of the investors, with more favorable terms and conditions.
Another advantage of being a member of a credit union is that management is done by members. Thus, there is a greater involvement in the planning of activities. This contributes to the financial resources having a destination that allows the members to expand their own business.
Credit union also have many services that are offered by banks:
- checking account
- savings
- safe
Before investing financial resources in an institution, the entrepreneur must know how that organization is controlled. In the case of a credit union, all members have the right to vote. In this way, everyone participates in management and monitors the progress of activities.