From time to time, every business owner considers the wisdom of borrowing money. When does it make good business sense to take out a loan?
According to 800fund, a leading FinTech that provides fast funding solutions to small- and medium-sized businesses, too many merchants borrow money without considering how much they really need and the costs of borrowing.
With the advent of the merchant cash advance industry, business owners now have access to funds, from $10 thousand up to $1 million. One such company is 800fund.com, one of the industry’s fastest growing. But how does the merchant know if borrowing makes sense?
Successful business people know that these decisions are driven by ROI–return on investment. For example, if Company A wants to expand its operations and needs $50 thousand to make the changes necessary, a realistic assessment of the potential benefit of borrowing the money must occur.
Should Company A borrow $50 thousand, there will also be interest that it must repay. For the sake of this discuss, let’s assume that the interest due is $10 thousand. That means that Company A must repay $60 thousand, within the terms of the loan.
Important facts to consider and questions to ask yourself? before obtaining working capital: Use of proceeds. For example; if Company A is financing inventory. How many times will that inventory turn? What is the end result and the bottom line of obtaining financing for inventory? How will this business financing ultimately help my business? Oftentimes, the particular product may be purchased in bulk and will drive higher margins. Sometimes the inventory acquired is a loss leader, not to worry, driving customers to your business will result in other purchase.
If Company A’s owner is firmly convinced that this expansion will generate profitable business in excess of the money borrowed (in this case $60 thousand), then taking out the loan would be good business.
Business lender 800fund suggested “Good business” reasons to incur debt include: buying necessary or more efficient equipment; expansion through acquiring additional vehicles; acquiring off-price inventory that can be turned over for a substantial profit; launching an advertising/marketing campaign to draw new clients.
Before securing the loan, a detailed budget should be drawn up, itemizing all of the costs associated with the plan, including debt payments.
Businesses should not borrow merely because the money may be available, rather than for a very specific purpose tied to increased profitability. This could result in a downward credit spiral, and place huge pressure on the business and its owners.
Prior to the financial melt down of 2008, banks were happy to lend to their business clients. Since then, however, they have become very risk-adverse, and shy away from lending except for their largest corporate clients. Smaller nontraditional FinTech lenders like 800fund have emerged in the alternative business lending space to provide business loan alternatives such as cash advance, factoring, equipment financing and business loans for individuals with poor credit.
Merchant cash advance companies have emerged and have lent an estimated $50 billion this year to small- and medium-sized businesses. They utilize non-traditional protocols for underwriting their loan portfolio, and are able to fund businesses quickly–sometimes within a day or two.