Saturday, March 2, 2024
AdviceFinanceStarting a Business

Funding your Business from Loans

Many business owners want to borrow money but are unsure of the variety of lending options. For others, the fear/risk involved in paying back stares them to face. However, for many businesses, there is a framework for thinking through whether borrowing money is the right tool for growing the business at that point in time or not. This is basically because the business is a classified one- could be a SME or a full fledged business.

There are always risks and rewards to assess when borrowing money. If your small business finances are sound, taking a loan could be the push you need to expand and take the business to the next level. At the same time, there are consequences if you default on your loans. This is one drive to borrow loans that will only be best for your business.

Of the many ways to borrow money and how to determine which would be best for your business, there is a wide variety of options to consider from accepting credit cards, merchant cash advance and term loans.

For Credit Card loans, they serve a good option for companies that have very short-term needs. The loan risk taker however has to ensure that the minimum amount required each month is paid (to avoid late payment fees) and a large balance is cut off. This is because the rates are often high and can affect the business largely.

In a merchant cash advance, the provider loans out money and, in exchange, the business owner agrees to pay the advance plus predetermined fees by letting the provider take a portion of sales each day until the entire loan amount is paid. Term loans let you borrow money and pay it back over a fixed term, usually at a fixed interest rate. New businesses that have unpredictable performance and sell most of their products through credit card payments can use Merchant Cash Advance to finance short-term projects. Also, the loan risk taker here has to fully understand the fees involved, because a Merchant Cash Advance doesn’t usually have interest rates but high fees.

Term loans are great for more established companies looking to fund longer-term investments at a lower interest rate. However, it’s important to think through whether or not borrowing will be cost efficient for the company just like in other business cases. Different products have different interest rates and fees, so there isn’t really one measurement to compare the true cost of borrowing.

Many businesses believe that comparing interest rates is the best way to understand the cost of borrowing. However, interest rates do not take into account additional fees or the time period of the loan, and certain products like the Merchant Cash Advance don’t have interest rates but high fees. Far from it, an accurate understanding of the seasons of borrowing involves the calculation of the Annual Percentage Rate, popularly referred to as APR. This means the total cost of all that must be paid or that will be incurred to borrow the money – including interest and fees. This would then be divided by the amount borrowed, and measured over a constant time or period (usually annually). Although, this method varies based on the nature product or service that the company deals in.

It is a conclusive thought to say that borrowed finance in a business is not the worst thing that could happen. However, if the risks are not properly analysed, it becomes an evil for the business in the long run. As such, businesses do not just need money to run, but they also need to sensitively acquire the money to run properly.

Abayomi Adeola (Della)

Abayomi Adeola Della is a Law Student in Obafemi Awolowo University. Author of two books, Entrepreneur, Business strategist/analyst, Leader and Blogger. She's passionate about business building and economic growth. Her best food is beans.

Leave a Reply

Your email address will not be published. Required fields are marked *