A good business plan helps an upcoming and existing business fix its asset and finance. It’s a good way to improve money and cash flow, regardless of the financial situation.
What Is Business Financing?
Business financing is the core of every successful operation. It allows a company to operate with the least financial struggle possible.
Having a good understanding of business finance allows companies to make smart financial decisions, such as the following:
- Knowing what assets to purchase and where to invest their cash
- Staying on top of business loans, repayments, and fees to pay
- Finding other means to generate assets and profits
- Increasing good credit and minimizing the payment of fees
Without this knowledge, some companies might experience financial distress in the future. It won’t give them the security they expect from running a company.
Why Do Companies Need Business Financing?
There could be several reasons why companies want access to business financing, and it doesn’t always have to be for an emergency reason.
Cash Flow for Operations
More cash flow means more working capital for a business to expand its operations.
This is ideal for small or start-up businesses that need cash to start investing in an asset like property, plant, and equipment.
Better Understanding of Financial Status
Business finance helps owners keep track of their income and expenses. Frequent financial reviews can help companies adjust their strategies to meet their demands.
Improve Credit Score
Taking out a business loan is part of finance. It’s vital for building a good rating that companies need for future funding.
Banks are more inclined to grant business loans and a favourable loan term to those with good credit because of the lesser risk they pose.
Two Types Of Business Financing: Debt and Equity Finance
There are two important concepts company owners need to learn: debt/loan financing and equity financing.
Knowing the difference helps companies come up with an effective strategy for their funding.
Loan Financing
Loan financing involves taking out a business loan. A business loan is a line extended by banks to companies, which has to be paid on a day certain in the future.
Certain loan terms will be established by lenders and an interest rate must be paid.
In exchange for business loans, banks would ask companies to give security, which usually includes physical assets, property, or a detailed business plan.
Providing security is crucial because banks feel secure, and it guarantees the repayment of the loan and regular repayments.
Advantages of loan Financing
- It is a quick and easy remedy to increase the funds and cash flow of a company
- A favourable loan term can be agreed upon between borrowers and lenders
- Easily fixed repayments can be made
- Interest fees may be tax deductible
Disadvantages of loan Financing
- The interest rate imposed may be excessive and unconscionable
- Charges apply in case of contract pre-termination or additional repayments
- Requires an asset or property as security to repay the loan
- Risk of inability to pay the loan in case of budget mismanagement
Equity Financing
Equity financing is a good alternative for companies that don’t want to borrow business loans and repay lenders.
Companies can generate capital by offering ownership to the company through stocks.
Investors must pay a predetermined amount, which companies can use as capital for their endeavours.
Advantages of Equity Financing
- No need to borrow money from lenders and pay an excessive interest rate or fees
- Quick access to funds and capital once there are investors in the company
- Does not affect the credit rating of a company
- No loan documents to worry about
Disadvantages of Equity Financing
- Feasible option only for big companies and not start-ups
- Ownership of a small part of the company is given up to investors
- Requires communication with investors for important decisions
- Regular payments to investors of their dividends
Frequently Asked Questions
Many steps are involved when qualifying for financing and a loan. Business lending companies evaluate a lot of paperwork before granting any business loan and financing.
Knowing the basics helps a lot in making an informed decision.
Is Qualifying For Business Financing Hard?
Qualifying for a business loan and financing is easy. It’s a simple and easy process to get funding, although it can get tricky at times.
There are two aspects to it: the application and approval process.
It’s easy because there’s already a standard lending criteria that must be complied with. More or less, the application process is the same for all potential customers:
- Submitting required documents
- Providing a security
- And a plan for how to repay the loan
The tricky part comes when it’s time to get the contract approved. Banks must evaluate their potential borrowers based on documents presented and risk factors.
At this point, a lender identifies the right loan to extend, given the risk involved.
How to Increase Chances of Getting Approved for Business Financing?
Anyone can apply for financing to help keep up with their business needs, although only some get approved.
To increase the chances of getting approved, a business must be prepared to submit relevant documents and information that banks will use for their assessment.
Such information includes the following:
- Company registration to prove its legitimacy and existence
- Updated tax returns for compliance with government-issued fees and regulations
- Financial statements proving how much the business makes in a year
- Future business plan of the company
- Proposed asset security for the loan
Lenders may also ask for more documents depending on the loan type, property proposed as security, and risk factor.
Which Is Better: Fixed Interest Rate or Variable Interest Rate?
Fixed or variable interest has its pros and cons. In general, fixed rates are better than variable interest rates.
Fixed-rate, as its name suggests, borrowers can make fixed loan repayments every month. This allows borrowers to create a comprehensive plan without worrying about the interest.
Paying the loan in advance is possible, but early termination fees must be charged.
On the other hand, the interest for a variable rate varies throughout the loan term. It goes up and down, and there’s a risk of exceeding your allocated budget.
Choosing between a fixed or variable rate depends primarily on a company’s cash flow and repayment ability.
Conclusion
Money is the lifeblood of businesses. It’s a compelling factor in making important company decisions that need to be assessed.
Business financing helps companies manage their business needs and expenses or increase their cash flow.
It’s also a great way to jumpstart a company and realize more income and profit in the future.
With different financing and loan options available in Australia, businesses can confidently run their company. Always ask for professional advice on how to minimize the risk involved in getting loans.
