You need money to make money. Small business owners turn to debt financing so that they can afford new equipment, additional workers, and other operational requirements needed to grow the company.
It is important to understand how debt works to improve an organization’s bottom line. Around a third of business owners who obtained loans are uncomfortable with them. Almost half of the respondents stated they have a hard time paying down their existing debts.
Before taking on a small business debt, you should know the different types available to you. It is also important to know how to do a Return on Investment (ROI) analysis and how to pay off your loans.
Types of Small Business Loans
- Small Business Term Loans
This type of debt is repaid with interest over a specific period. Approval for this loan is fast and doesn’t require any collateral. However, the repayment period is short. The Annual Percentage Rate (APR) does vary from one creditor to another and depends partially on the amount borrowed and the borrower’s credit rating.
- Small Business Credit Cards
Credit cards allow owners to purchase now and pay later. Just like consumer plastic, owners can get them from different financial institutions. Some accounts offer cashback rewards and other benefits. Make sure that you compare cards from different banks and financial institutions to find the one that fits your requirements.
- Lines of Credit
This type of debt is different from a loan. When you get a line of credit, you gain access to a certain dollar amount. You can withdraw from it when you need cash. On the other hand, a loan provides you with a lump sum.
One advantage of a line of credit is that you pay interest only on the amount you borrowed. However, the APR varies over time. It might have a low-interest rate at the start, but the APR can increase with no warning.
You also pay a small fee every time you borrow from it. The fee ranges between 1 and 3 percent. That’s one reason some owners are wary about taking out a line of credit.
- SBA Grants and Loans
Government agencies offer grants and loans that include disaster loans, real estate, and equipment loans, microloans, and other general loans. The best thing about these is that they have the lowest APR on the market. On the downside, though, this type of debt is hard to get.
Small Business Debt Return on Investment
Business owners should conduct an ROI analysis to determine if it is the right time to get a loan or not. Owners should look at different factors when considering the return on investment and not just the cost of capital.
Return on investment is the measurement of gains accumulated from an investment, as compared to its costs. It helps you find out the value of growth opportunity to your business. When computing for the ROI, you should also consider the APR, which is the total amount of interest payable on the debt yearly. The APR includes service charges and other fees.
Uses of Small Business Debt
Debt has a negative connotation because people think of it as an obligation to repay over time. However, you don’t need to think about it in a negative manner. There are several good reasons why you should get one for your organization.
Launches the Business
Some people borrow money to launch their business. This is ideal when one doesn’t need a lot of capital to begin the business. The loan can cover the operating costs and equipment until the business earns a profit.
Boosts Credit Score
If your business doesn’t have a credit history, then getting a $5000 loan will help you establish one. Just make sure you pay it regularly and before the due date. Make small purchases using credit to boost your credit rating. This strategy can help you establish a good credit history that could allow you more and better credit in the future.
Getting a loan can also help you expand your business. You can use a credit card or a line of credit to attract new employees, buy more equipment, or lease a new workplace. Expanding your venture should help you repay the loan quickly.
Manage Seasonal Requirements
Even if you plan for slow periods, there are times when you’ll face cash flow problems. You can use a small business debt to get through the rough times and help you prepare for the next sales cycle.
Paying Off Small Business Debt
It is important that you optimize your operations so that you can improve your profits. By getting the most out of debt, you will make your company more profitable. To pay off your loan, you should look at the expenditures of the business. Find areas where you can cut costs. By reducing your overhead, you’ll be saving up for debt reduction.
You can also postpone big purchases that are not essential to daily operations. You can use the money to pay down your financial burdens. If you have numerous different debt, you should consolidate them into one with low interest. You pay less interest and only need to remember one account at a time.
As you can see, debt is a powerful financial tool for small businesses. When used the right way, it can help boost profits and help your venture grow at a fast rate.