Outside Financing is Better Than Using Your Own Money for a New Business Venture
You’ve got a great idea for a new business venture. The market is right and you can attract customers quickly. The only issue is how will you go about financing the new business? One approach is to dip into your personal resources. Rather than doing that or taking on investors, consider seeking a business loan or establishing a business line of credit. Here’s why the latter approach works so well.
You Get Access All the Startup Capital That You Need Now
Business financing allows you access to all the money needed to get the business up and running. If you project the expenses responsibly, there will be funds to take care of costs like setting up your place of business, taking care of the car finance for a business vehicle or two, and making sure you have reserves to get through the first year.
The trick is to determine how much you need without taking on too much debt. That’s one of the great things about a line of credit; you only pay interest on the current account balance. Even with a loan, it works in terms of having a fixed series of payments along with a fixed interest rate. That makes it all the easier to include the debt in your operating budget.
Debt Can Be Better Than Opportunity Cost
How will you go about financing the preparation of goods or services needed to fill a large order? Maybe you don’t keep enough inventory on hand for something of that size. If you have a business line of credit, getting the funds to fill the order is a smart move in more than one way.
The key is to understand opportunity cost. Simply put, what approach would allow you to take advantage of the opportunity and still generate the best possible return on the investment?
Consider what happens when you use the line of credit to buy whatever you need to fill the order. The customers’ payment terms are sixty days. That means you’ll pay interest on the amount borrowed for sixty days. Assuming it will cost you $20k to prepare and ship the order and the price is $100k, that sixty days worth of interest won’t make much of a dent in your net profit.
This approach still leaves you with access to operating funds to keep the company going while you wait for customer’s payment. If you were using your own funds to financing the business, would you still have that type of cushion? For many entrepreneurs, the answer is no.
Loans and Lines of Credit Mean You Keep the Business Equity
Loans and lines of credit allow you to retain full equity in the company. They insulate you from needing investors to keep the business going six months from now when your personal reserves run low. As long as your lending arrangement is flexible enough to help you through that first year of operation, the business financing will ensure you don’t have to deal with silent partners, or investors who want a piece of the action.
There Are Tax Benefits Too
Did you know that the debt financing that comes with loans and lines of credit provides tax benefits? Depending on how you use the funds, there will likely be tax breaks. Add those in with other breaks that may apply because of the business type, the location of your operation, and other factors that come into play, you could reduce the company’s tax burden by a significant margin.
When this is the case, the debt financing helps offset the cost of carrying those loans or lines of credit. When it’s all said and done, the savings on taxes could be enough to offset any interest that you pay on the financing.
You Answer to No One
Perhaps one of the most important aspects of choosing to finance your business with loans or a line of credit is that you remain in charge of the operation. It’s true that the lender will expect you to repay the debts according to the terms and conditions of the lending agreements. What they won’t do is attempt to insinuate themselves into the day-to-day operation of your company.
There’s no one looking over your shoulder wanting to know why you make a particular decision. You don’t have to justify any activity to anyone other than yourself. It’s possible for you to take risks without anyone saying that you can’t do that. In short, you call the shots and retain full responsibility for the outcome.
How will you finance your next business venture? While investors work fine in some instances, find out what lenders are willing to provide in the way of loans or lines of credit. You’ll find that this approach provides many advantages and may be just what you need.