Being a business owner, part of your job is attracting the right type(s) of funding for you, your business, and your financial goals. Nowadays we have a wide variety of options available in the market, but most likely only a few will match your purpose. What factors are essential to take into account when looking for funding? And how, despite having many different pros and cons, can you compare different types of funding? In this blog, we elaborate on four different factors in this matter.
1. Interest and duration
Both deserved and undeserved, these two are often the decisive factor when it comes to comparing different funding types. Interest rates highly affect the cost of funding, while duration influences the amount of pressure to repay a loan. Therefore we can state interest and duration are both very important factors when deciding on the right type of funding for your business, but they are not all-encompassing in comparing and making decisions. The total cost of funding is not only decided by interest rates but by other factors as well, such as cost of administration, service fees, or commitment fees (see point 2). And when it comes to the duration it’s mostly a matter of selecting the right fit for your financial needs as opposed to the longest possible extent. After all, repaying the loan on your business premises might not be done in two years, but a loan for inventory is most likely best paid off in such a short amount of time. The right duration for your financial solution is entirely dependent on your financial goals and planning.
2. Additional costs and terms
As stated above, the total cost for funding relies on a number of factors, which should all be taken into account when comparing different types of funding.
For starters, you should consider the cost of financial advice. Some business owners take out the time to research finance options without any help, but in many cases this time simply is not available. A number of business owners therefore seek support from a financial advisor, accountant or controller. In some cases, a controller or accountant can be consulted on an in-house basis, but oftentimes businesses need to attract experts from outside. And professional help comes with a certain price tag.
Next, remember that certain characteristics of a finance solution will contribute to its overall cost. Lenders can opt to apply administration fees, service charges, or commitment fees. The latter entails an additional cost for any funds that are not drawn down by you, the client but are held available by the lender. In addition, the lender may or may not work with penalties in the case that your bank account has insufficient funds when a repayment is due, or when you want to repay the loan early. It truly pays off to look into the terms and procedures of the lender you are considering before you sign any contract or agreement.
Lastly, don’t be tempted by “temporary deals”, “special offers” or “unrealistically low price”. A decent lender works with a clear, transparent pricing model and will always inform you every step of the way. Information with regard to pricing and procedures should be readily available from the institution’s website. When in doubt of an institution’s legitimacy or transparency, you are free to withdraw yourself in any stage of the procedure before signing an agreement.
3. Repayment structure
There are several repayment structures that a lender can offer. As a business owner, you might benefit more from a certain structure over another. The way you want your repayment schedule structured depends on your cash flow and the frequency of repayments that your business can handle. A weekly or monthly repayment plan can stress the business’ cash flow, but on the other hand, work really well for businesses dealing with steady in- and outflows. Does your business rely on income from one particular season in the year, you might benefit from a structure with quarterly repayments.
In addition, you can opt for a linear schedule versus a schedule with an annuity. In the case of an annuity repayment schedule, the payments are fixed, but the ratio of interest versus loan repayment fluctuates. In a linear repayment schedule, the repayments stay equal, but the interest rate over the outstanding amount will fluctuate, causing the payment amount to change with it. Both options have pros and cons. Which one will fit your business best is a matter in which a financial advisor could support.
4. Securities and flexibility
Financial agreements often require a form of security from you as a client, such as a corporate or personal guarantee, pledge, or other means of collateral. Depending on the stage of funding your business is in, you should consider whether or not it is worth losing collateral. Giving up (part of) your collateral means being less flexible in future financial endeavors because most business owners simply do not have the space to cover securities a second time. So if you are planning to attract additional funding in the future, you might want to consider whether you want to start with a secured finance option or an unsecured one. That being said, secured loans do often work well in a mix with unsecured finance options. Opting for an unsecured finance solution in the early stages of your business allows you to attract secured finance in a later stage.
Another important aspect of financial solutions is flexibility. As a business owner, being flexible in your financial structure is a great advantage. Look into aspects such as the options to repay early without being fined, the possibility of topping up your loan during the run of your repayments, or extending the duration period. Some lenders offer these possibilities without charging any additional fees of fines. The flexibility that comes with these options allows you as a business owner to quickly act upon new opportunities and grow or expand your business.
It is obvious that choosing the right type of funding for your business comes down to more than just comparing interest rates. Take all the factors we’ve mentioned into consideration when comparing, and always remember what your financial needs and planning entail.
At Spotcap we strive to improve accessibility to straightforward finance with transparent features and pricing. Quality is our main focus and we are here to help you grow your business.
For more information please visit https://www.spotcap.nl/