Overview
One of the most difficult aspects of running a business is having the capital to make investments for long term growth. There are many business owners who do not know when a business loan is needed. In addition, many people are afraid to borrow money because the debt payments can eat up cash flow over the long term. The good news is that there are several rules of thumb about when a person can and should borrow money for a business. However, this is an important decision that deserves a lot of attention. Here are several things to remember about the importance of capital and credit within a business.
What is Capital?
Capital is the amount of money that can be invested into a project for the business. This can come in the form of cash or other payments. Having a large amount of capital is a big advantage for a business. If a business is cash poor, they may still have the ability to use their capital to borrow money. The business may have to put their property or equipment up as collateral for the loan. Many small businesses are very capital intensive where little leftover cash is available. This is true of a lot of businesses in the growth phase of their company. Always be sure to borrow the appropriate amount of money for your needs. Never borrow an amount that you cannot pay off over the long term.
Borrowing Money
When a business first starts up, many times the company owner will borrow money to get it started. However, if a company is expanding rapidly they can borrow money throughout the course of business as well. Borrowing money for business is not a bad thing, but it needs to be completed carefully. Many companies get themselves into trouble because they borrow too much money and cannot pay it back over time. This can lead to the downfall of the business over time. Even if you can pay it back, many times this cash could be put to better use in other areas of the business. If at all possible, early stage companies should look for alternate means of funding. If a company must borrow money, borrow an amount that can be paid off quickly.
Working with a Bank
Although there are plenty of lending options online, going to a business bank is still the most common way that people receive a business loan. There are several different benefits to going through this borrowing medium. One of the biggest is the fact that banks have experience in lending money to companies. They can offer some insight into whether or not the money will be paid back over time. Over the long term, this can be really helpful advice to any business. Always be sure to work with a bank that has the best interests of the customer in mind. Many banks simply want to lend out as much money as they can.
Interest Rate
The interest rate on the debt is an important factor in how much to borrow. The higher the interest rate, the more expensive it will be to borrow money. If a company is in its early phases, it is going to be more risky for the bank to lend money to. This means that the interest rate that must be paid by the company borrowing the money will be higher. Always be sure to ask about the interest rate and whether or not that number is flexible. Over the long term, this can greatly reduce the cost of borrowing if the interest rate is lower.
Final Thoughts
One of the most important aspects of running a business is capital and credit. It is vital for a business owner to understand when to borrow money and how much to borrow. The credit rating of a company is one of the key factors that will influence the interest rate that must be paid. The younger a company is, the higher the interest will be on the debt. A business bank is a good resource for information and advice for a company over the long term.