Credit and Financing
Capital is the monetary requirements of a business firm to operate. So whether you are just setting up or already running your business, the source of capital is an important consideration.
Credit and owner’s equity are the conventional sources of financing among businesses. Since every firm starts out small, seldom do investors inject money to the enterprise. Additional and amenable options, however, become available as the business grows. It is important for a business to have a steady cash flow. Aside from the recurring operating expenses, other payments such as tax and other duties arise. Most of the time, the owner’s equity becomes inadequate to support the growing needs of the business. It is therefore important for the owner to be familiar with the terms, benefits and risks of credit.
Your Personal Credit Line
Using your personal line of credit is a convenient way of financing the business. You can use your credit card or borrow cash from your family and friends to suffice the expenses. However, with a growing business, these methods have immediate limitations. These methods are optimized for personal use and emergencies so in time, it becomes inadequate to support the growing needs of the enterprise.
It is important to consider certain points when using personally borrowed money or your credit card. Below are some questions you may ask to gauge the extent of your personal credit:
- Until when can the cash support the enterprise? How much and how fast are you spending the money?
- Will more cash be available?
- What are the terms of repayment?
- When are your friends and family expecting their money back? Do they have plans for this money?
- What will happen if the debt is not repaid? What will you lose?
A business loan is an amenable option when starting your enterprise. You can also avail of business loans to expand the business. There are many institutions that offer loans depending on your business scale. It is important to familiarize with their terms so you can make the most of their offers. It is best to visit the banks and offices so you can discuss the options for your business.
It is also important to discuss these options with your financial advisers. Seek the opinions of your accountant and auditor when getting a loan. They know best if your business can repay the loan in time. Moreover, talk to your lawyer to verify the legal implications of getting a loan.
Imposing an Overdraft
Overdrafts are a form of financing that allows business to make purchases using their accounts even if the available balance is not enough. Overdrafts are a form of short-term funding that businesses can take advantage of. However, it is important to always review the terms and status to avoid incurring unnecessary expenses.
When deciding on external financing, it is important to have a long-term plan. This will give you an idea of how you can repay the loans you will avail. It will also ensure you that the loan will go to the business and not your personal needs. .