Small Business

How to Make Every Penny of Your Small Business Financing Count

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Are you a small business owner without enough cash on hand to cover the costs of your operations and projects? You’re not alone.

While a small percentage of small businesses can turn to venture capital, and some can rely on loans from family and friends, a common choice is to get your hands on business financing. This can mean a business loan, line of credit, credit card, or another form of debt financing that you can use to plug working capital gaps, pay for expansions, and cover other important expenses.

The decision to take on financing may be common, but you shouldn’t make it lightly. It changes the economics of your business, and you need to make sure you take full advantage of your new infusion of capital.

Making every penny of your small business financing count starts with excellent planning, and continues through repayment and beyond. In this article, we’ll discuss what to do with your business financing and how to avoid mistakes that can hamper your effectiveness, sink your credit, and limit your future options.

Determine Your Funding Needs

If you’re reading this, you may already have a good idea of how additional financing can help your business survive and flourish. Common reasons for seeking financing through a loan, angel investors, or venture capital include:

  • Working capital funding to cover day-to-day expenses
  • Replacing, upgrading, or repairing equipment
  • Jumping on deals for inventory
  • Hiring full-time or part-time staff
  • Marketing
  • Expanding or renovating physical footprint

To get a sense of what to prioritize and what should come first when it comes to using your financing, follow these steps:

Update Your Business Plan to Reflect Your Financing Needs

One of the first steps you need to take when starting a business is writing a business plan. Your business plan is a roadmap for success that details your business’s mission, products and services, expected milestones, financial information, and plans for future growth.

But unlike the kind of roadmap you use when planning a road trip, your business plan is not a static document. As your business grows, you should update your business plan with new projections that include your need for, and expectations of, new financing.

When approaching a lender for a loan, whether you plan to start with your local bank, an SBA-approved nonprofit bank, or an alternative lender, you must have a specific amount in mind. Asking for “as much as possible” is a quick way to get rejected, not to mention impossible to plan or budget around. If you can’t attach a specific dollar amount to a determined project (a bulk inventory purchase, renovating your location, etc.), you shouldn’t seek a loan.

Not only will an updated business plan bolster your loan application (in fact, some lenders require it), it will also help you stay on track and use your funds effectively once they’re in hand.

Discuss Your Funding Needs With Your Accountant

One of the first hires any small business owner should make — whether it’s on a full-time or ad hoc, advisory basis — is an accountant. You can use accounting software to track your cash flow and other financial metrics, but an accountant helps you see the big picture for your business, both today and down the road.

Once you identify a possible need for business financing, your accountant is the first person you should talk to. They can advise you on what financing product might be best for you (more on that in a bit), as well as the next steps for making this a reality.

Work Toward Qualifying for the Most Affordable Loan

Not every small business financing product is created equal. Some loans come with larger dollar amounts and lower interest rates; others have more stringent repayment terms, but fewer barriers to qualifying as well as quicker application and underwriting processes.

Who is more likely to qualify for the former? Business owners with strong personal and business credit scores, as well as a business that produces a lot of revenue and demonstrates profit, among other factors. Newer businesses that don’t have the credit history or track record, or need funding quickly, typically take the latter.

If your funding need isn’t pressing — maybe you have long-term plans to renovate your space, or to expand into a new market — take the time to strengthen your argument for a loan by cleaning up your credit scores, cutting costs to increase profits, and simply continuing to prove your viability (the longer you stay in the business, the better, in the eyes of lenders).

Best Practices to Follow After Obtaining Business Financing

As your business grows thanks to the infusion of new capital, it’s important to remember your responsibilities to your lenders and/or investors — as well as to your own long-term financial well-being. A couple of things to keep in mind:

Follow your Scheduled Repayment Plan

This will be discussed further in the “Mistakes” section, but when you take on financing, any reputable lender or investor will work with you to create a scheduled repayment plan.

For example, some lenders will want to receive regular payments on a monthly or even weekly basis. Sometimes, investors won’t seek to recoup their investment until you hit certain milestones (albeit by certain target dates).

Once you have a plan, stick to it. Unlike your business plan, you can’t update this kind of plan on a whim.

Look for Possibilities to Refinance

Certain financing products, particularly shorter-term loans, have relatively high interest rates that may be feasible for small businesses but not preferable.

At some point during the repayment of your loan, you might find an opportunity to refinance your existing debt through a different loan product with a lower APR (annual percentage rate).

If, through increased revenue and/or an improved credit score, you qualify for a loan with a lower APR, you can save untold sums in interest payments. Constant communication with your accountant on this front is crucial.

Mistakes to Avoid With Business Financing

It’s one thing to follow best practices when using and repaying your business financing. But another element of making your financing count is avoiding familiar pitfalls that have doomed other small businesses in the past. These mistakes include:

Not Aligning the Timing With Your Funding Needs

If you see a potential major investment on the horizon, don’t wait until the last minute to apply for financing. If you start the process early, you’ll be more likely to have your financing in hand for when the time comes to invest.

Conversely, some financing products have very specific windows on which the clock starts ticking as soon as you obtain it. For example, a business credit card with 0% APR financing for the first 9-12 months (depending on the card) gives you a chance to pay no interest on any purchases during that period. Don’t open up this card and let it sit unused for the majority of the offer. Plan to obtain it just before it’s time to make some big purchases that will take a few months to pay off.

Choosing the Wrong Financing Product

As mentioned above, you’ll likely have more than one financing product available to you, depending on your funding needs. If you’re looking to upgrade heavy equipment, for example, you might go with an equipment financing offer, but a long-term loan from a nonprofit lender or bank might also work.

If you expect to have recurring financing needs over the next few months and years, however, a revolving line of credit and/or business credit is a better fit, as you’ll be able to draw from your pool of funds without needing to reapply each time.

Some loan products will be for the exact amount that you need (equipment financing), while others will be more important for their timing (invoice financing and some short-term loans can be approved in as little as one business day). The right product for the right need is an important consideration when applying.

Failing to Repay Your Loan on Schedule

The antithesis of making the most of your small business financing is making mistakes that lead to you paying more for your loan than you should.

Once you have a loan payment schedule on the books, make your payments on time. Or, read the fine print (and/or enlist your accountant to do so) to see whether paying off your loan early makes sense for you. For some loans, there is a prepayment penalty; in other situations, paying off your loan early won’t do anything for you and may even hurt you if it disrupts your cash flow. Otherwise, hold up your end of the bargain and pay your loan back on time.

Whether or not you parlay this success into another round of financing, responsible debt management is always crucial, not just to your credit history but to the fortunes of your business.

The Bottom Line on Making Your Financing Count

Making the most of your small business financing starts with proper planning. Executing on your vision for your new source of capital is also vital.

The next step? If you use your financing wisely and find yourself in a stronger financial position after repaying your loan, it may be time to take stock of the landscape and see if another, even more affordable loan (such as a long-term SBA loan or bank loan) is right for you.


Eric Goldschein is the partnerships editor at Fundera, a marketplace for small business financial solutions. He has nearly a decade of experience in digital media and has written for outlets including Business Insider, Startup Nation, BigCommerce, Square, HostGator, and Keap, covering finance, marketing, entrepreneurship, and small business trends.

How to Make Every Penny of Your Small Business Financing Count

This blog post was published by Axos Bank on March 6, 2020 and last updated on March 20, 2020.

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