Some of the significant factors you need to consider when choosing business finance services.
When running a business, equity won’t suffice to cover all your working capital and capital expenditures. Because of this reason, you need to employ services from lenders for business financing. There are many ways to finance a business, and you can also choose from a wide range of lenders.
However, here are some of the significant factors you need to consider when choosing business finance services.
1. Interest Rates and Fees
One of the main factors you need to consider when choosing a business finance service is the is the total cost of getting it. When it comes to business finance services, interest rates and fees are the costs tied up to it. Before you sign any document or deal, try adding up all the expenses and the interest rate associated with the particular business finance service. The goal here is to choose the one with the lowest cost possible.
2. Repayment Schedule
Another aspect you need to consider is the repayment schedule of the financing service. For some financial assistance, you are given the liberty to structure your repayment schedule according to your financial model. However, for some services, you are given a strict schedule of periodic payments. The right repayment schedule will depend on the financing model that you have. Take into account the money you need to allocate for each principal and interest payments before you finalize.
3. Type of Financing Facility
Depending on your financing requirement, different types of services are offered. Usually, these facilities are classified into two categories: short term and long-term facilities. Long term facilities are generally used for capital expenditures and big projects. As its name suggests, the facility typically carries a long tenor that ranges from 2-10 years.
On the other hand, short term facilities are usually used for short term requirements such as working capital with a short tenor of less than one year. Some examples of short-term facilities are invoice financing, trade financing, revolving credit lines, letters of credit, and trust receipts. For better appreciation, here is a short description of each.
- Invoice Financing
Invoice financing is a kind of business finance service that encourage corporations to borrow money against invoices, which are receivables due from customers. This method will enable you to get cash from your invoices while extending credit to your customers. At the same time, it also allows you to improve your business’s cash flows.
- Trade Financing
On the other hand, trade financing facilities extend credit by en-cashing purchase orders. First, the lender can pay for your purchases, and later you’ll pay the lender back after a few days. This option gives you more time to make a sale before paying for the supplies that you bought.
- Revolving Credit Line
Revolving credit lines are typically used to fund working capital. A revolving credit line can be linked to a credit card wherein your credit gets replenished up to an agreed threshold, also called a credit limit. It may be used when needed, as long as you haven’t reached your credit limit yet.
- Letters of Credit
Letters of credit are banking instruments between a supplier and buyer, which guarantees the buyer’s payment to the seller. If for instance, the buyer doesn’t pay for the goods in any case, the bank will need to cover the amount in full. Between a supplier and a buyer, the bank serves as the middleman who guarantees the supplier payment. It’s mostly used in international dealings when both parties don’t know each other personally.
- Trust Receipts
Trust receipts are financing documents drafted up by the bank, allowing the buyer to pay for goods they bought after their inventory is sold. It implies that the lender will extend credit even after you received your products already.
4. Financing Requirements
Lastly, you need to consider the requirements that the business finance provider will ask from you. Make sure that you have all the elements ready so that you can avail of the service once you apply for it. Some facilities require specific financial ration tests, such as debt service cover ratios and debt to earnings before interest, taxes, depreciation, and amortization (or EBITDA) ratios. So, if you know these tests beforehand, you can make the necessary adjustments to meet them.
Choosing the right business finance service is crucial when running a business. Guided by these factors, you ‘ll be able to select the right business finance service that is compatible with your business. Hence, with the right business finance service, you ‘ll be able to expand your business faster.
Archie Thomas is a full-time blogger who loves to write articles on business, finance, and law. Archie reads countless materials on these topics before writing content in his blog to ensure that he can satisfy his readers’ needs for knowledge.