It can be fun and exciting to start and operate your own business. You have the knowledge. You have the experience. You have the drive. What you may not have though is a lot of money. Some capital you may have in cash; other capital may be in other resources. How you manage your financial resources will largely determine the successfulness of your business.
Managing your business finances does not have to be a worrisome burden. Much of it is common sense and wisely using the money towards making money. There may be some financial resources you may not know exists. We will review some suggestions for managing business finances and introduce you to some financing avenues you may not know about.
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Financing Can Help You Fund Your Business
For small or medium sized businesses or even a new business, you may have available capital in another way. Maybe it is in your plant, business or personal property, or equipment you own. You can access the capital available in them to provide you with needed funds to finance your business. As your business grows or reaches later stages of development, equity financing or mezzanine capital could become choices as mentioned here. Once it involves financing and the way it’ll have an effect on your business, less is more.
Beneficial Uses of Financing
- Finance growth, expand into new areas.
- Take on more work; sign larger contracts.
- Purchase more and better equipment.
- Hire more employees.
- Make longer-lasting repairs of maintenance causing issues.
- Purchase another business.
Business Financing is for Business Purposes Only
You just mortgaged your house to help finance your business. With money in hand, an idea pops in your head:” Now I can buy that truck, buy that boat, take that trip I always wanted.” No, no, no. Reject that notion! People who make that mistake often times find themselves in financial hardship. They end up with no money to fund their business, no business to pay their mortgage, and now they are in jeopardy of losing their home.
Put the money to work in your business. Let the business make money for you to acquire and do the things that you want to do. Remember, the business is your source of income, not the financing of your business. Let the money fulfill its intended purpose, and you will sleep easier.
Make Business Expenditures Based on Return on Investment (ROI)
“Should I buy that new piece of equipment?” “Should I hire another employee?” “How much should I spend on advertising?” These are all questions that business owners asked themselves. The answers to these and other like questions should largely be decided based on their ROI.
The piece of equipment that will cost you $300 a month to finance, how much will it make for you in a month? That’s your ROI. Should I buy a used one or spend more for a newer model? How much more money will the newer model make me than the used one? What will be the maintenance costs of the used one compared to how much it will make for me? Add in the monthly finance costs, and you are figuring out your ROI.
Making expenditure decisions based on their ROI will help you manage your financial resources wisely. Tip: For new businesses or for business owners with less than perfect credit histories, financing will be more expensive than for your more creditworthy counterparts. Try not to mainly focus on the cost of financing, but the ROI that the financing will provide you.
As you become more business creditworthy, your cost of financing will decrease. If you let the cost of financing paralysis you, then you may not have a business. Figure out the ROI that the financing will provide you, and make an informed, emotion-free decision.
Invoices – A Financing Resource You May Not Realize You Had
Are your customer’s other businesses? Do you invoice them when you have finished your contracted service? Do you have to wait to be paid? Do you wish you could be paid today?
If you answered yes to the above questions, then you qualify for another type of financing. Invoice financing, also known as factoring, is a type of financing where your submitted invoice is the collateral. Different financial institutions may vary on the application or have several programs that involve invoice financing, but here are the basics of how it works:
- You provide a service or complete an order for another business.
- You submit an invoice for the contracted work.
- You submit a copy of the invoice to your financing institution.
- Your financing partner will advance you an agreed upon percentage of the invoice.
- Depending upon the program, you will collect on the invoice, or the financing company will collect on the invoice.
- The financing company will send you the rest of what you are owed on the invoice minus their financing fee.
As was stated, depending on the funding company and the program, the paying and collecting part will vary. Different invoice financing programs will have different qualifying criteria and benefits. The main thing to know is that it is available.
Many companies have poor cash flow because they are waiting to be paid. Some are financing their businesses with credit cards while waiting on payment and paying the high-interest charges. If this is true with you, it is in your financial interest to check out invoice financing. It will open up more work opportunities and save on financing charges.
So, managing your business financing resources is not hard. It just takes some common sense, self-control, and a little education of the financing options available to you. Proactive management will help your business to thrive and be successful.
Alex is fascinated with “understanding” people. It’s actually what drives everything he does. He believes in a thoughtful exploration of how you shape your thoughts, experience of the world.