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How to determine your business financing needs and pick the best option
Not sure if your business needs a loan? Use this guide to find out.
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Most businesses could do better with extra money. But figuring how and when it’s a good idea to seek financing is another matter. Understanding your financial needs is the first step toward narrowing down your financing options — or whether you need financing at all. We guide you through the preliminary steps to steer your business to the right path.
Five questions to determine your business’s financial needs
To decide whether your business needs outside financing, ask:
- Is my business doing well? Although it sounds counter-intuitive, It’s generally a bad idea to look into financing — especially loans — if your business is struggling. Not only will you not qualify for many financing options, but you also risk getting caught up in a cycle of debt if you can’t repay the loan.
- Are some seasons more profitable than others? Among the few times financing could be a good option for a struggling business is when it suffers seasonal losses. Access to extra funds can keep you afloat in the off-season until sales pick up and you’re able repay it more easily.
- Do I need to build my credit? Consider taking out a small loan you’re certain you can repay. By building up your business’s credit score, you’ll get better rates on future loans.
- Am I ready to expand? Business financing can be that extra push to making your business more profitable in the long run. But make sure you’re ready for that kind of growth.
- Can I afford to buy all the equipment I need to run my business? If a lack of equipment is holding you back, it might be worth it to look into business equipment financing.
How to choose your best financing option
The financial state of your business will largely determine your financing options. To avoid losing yet more money, struggling businesses should generally avoid financing options until they’re back on their feet. If your business is growing and you want to put more fuel in the fire to grow even faster, a business loan is a good option.
In addition, how seasonal your business is and the industry it’s in will impact which financing option you choose. For example, seasonal businesses might want to look into opening a line of credit for access to cash that covers day-to-day expenses when profits aren’t enough. And businesses in the agricultural and manufacturing sector could benefit from equipment loans to directly affect their profits.
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Case study: Michael gets a line of credit for his pizza shop
Imagine this scenario: Michael opened a pizzeria next to a high school. He made more money than he could’ve ever imagined — that is, until summer arrived.
All set to go to the bank for a loan to cover overhead costs for the summer, Michael wanted to make sure it was the right choice for his business. After researching small business financing, he learned that a line of credit could be better for his pizzeria. With a business line of credit, he’d only take out what he needs, when he needs it — allowing him to better manage his debt.
Only needing $5,000 at the time, he took out a $10,000 line of credit with LendingClub to be safe. The line of credit came with an 8% interest rate, and Michael paid what he borrowed within the first few months of the school year as business picked up again.
Bottom line: Understanding your business’s needs is the first step to making a smart financing decision. You won’t be ready to compare your options if you aren’t able to narrow down the type of financing you’re looking for and why you need it.
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