There comes a time in every business journey when financing is the best option for growth and stability. Some business owners require financing to get started while others revisit this option regularly throughout their entrepreneurial journey.
The key to finding success in credit and financing is to be a responsible borrower. Here are five tips for responsible borrowing in your business.
1. Research Your Loan Options
There are infinite financing options to choose from for every business type, loan size, and credit score. There are short-term, quick turnaround options like commercial vehicle title loans and long-term, meticulous approval options like business lines of credit.
Approach the process with an open mind; you likely have more options than you think. Shop around between lenders and compare the terms and interest rates. Even if you’re in a rush to secure money to cover expenses, there’s always time to think logically; your business longevity depends on it.
2. Have a Definitive Financial Plan
Take some time to outline a clear financial plan. Every cent you borrow should be accounted for and have a definitive purpose. While you may get approved for more, you should only take what you need.
Outline how you’ll cover the payments and interest to ensure you can afford the loan. People who skip this exercise are the ones who have issues down the road.
It’s also wise to outline long-term financial plans and corrective action if your business is in trouble. Don’t hesitate to consult with a financial expert for guidance.
3. Work on Your Business Credit Score
Your business credit score will determine how much you’re approved to borrow and the terms of your agreement. While there are plenty of options available for businesses with poor or non-existent credit, the interest rates tend to be better for those with strong scores.
Build your business credit score by using credit to pay bills and using credit payment terms with vendors when possible. Taking short-term loans and paying them back on time will also help this process.
4. Read the Fine Print
Always take the time to read the fine print and understand the terms before signing for a loan. Remember that the only stupid questions are the ones left unasked before making a financial commitment.
Understand that lenders have a code of ethics they must follow for consumer protection. Take some time to review the Truth in Lending Act (TILA) to ensure you’re working with a reputable lender and know your rights.
5. Be Proactive in Communicating Issues
Ideally, you won’t borrow money you can’t pay back. There are serious consequences to defaulting on payments, especially for a business. However, you may experience a time when you must delay your payment.
If this issue arises, be proactive in contacting your lender and making arrangements. In most cases, they’ll be open to discussing your options. Remember— they want you to be able to pay as they tend to lose money on collateral in defaulted loans. The key is to be open and to make the best possible effort.
By following these tips, you can borrow responsibly to finance your business. Do your research, know your rights, and make smart financial choices.