Business Financing Basics

Business Financing Basics

At some point in the life of your business, you’re going to need to augment your bottom line by financing something. You could need to buy a new piece of necessary equipment. Your accounts receivable may fall temporarily behind and the resulting shortfall requires you to get help making quarterly taxes or insurance payments. Regardless of why you need the money, you’ll want to know the best way of getting it. That’s where understanding how financing works comes into play.

Your Collateral

There are two main ways to secure a loan from a financial institution. The first way is to use your business’s good credit rating, and also perhaps your own personal one, as proof that you’ll promise to pay back the funds you borrow. It’s common to do this and banks are familiar with this route. The other is to investigate asset-based lending. This is where you promise to surrender specific assets if you ever default on the loan. Lenders are also familiar with this method. For example, your home mortgage is an example of asset-based lending. You borrow the money to buy your home using the home as the collateral in this instance.

Assessing Your Assets

Keeping a current, honest valuation of your assets is key in any business. That list will come in handy if you’re seeking asset-based lending from your bank. What kinds of assets can you include on that list, you wonder? Pretty much anything you can enumerate as an asset. The equipment and property you own are obvious list additions. However, you can count your inventory and accounts receivable, too. Keep in mind that asset-based lending is easier to find if you’re using liquid assets as collateral.

You’re Good for It

Your business credit score is very important. It will weigh heavily in any decision a lender will make to either give or deny you a loan. Your business score is different than your personal one. It ranges on a scale up to 100. You frequently have to pay to get that score unless you have an account with a financial service company that provides it to you. A way to improve that score is to ask your vendors who report to the three business credit bureaus – Equifax, Experian, and Dun & Bradstreet – and be sure to pay those invoices on time.

The biggest difference between asset-based and credit-based lending is the amount of interest you’re charged. You can figure out which works best for your needs.