Borrowing Money The Basics! |  |
Are you an inventor or a small business owner that is wondering where to get money to expand your business or to add a new dimension to your company? Perhaps you wish to add some new products or services or want to market to a new customer sector but there is not enough money in your bank to commit to the proposed business expansion project.
You are not alone if you do not get how to find entrepreneurial investors that are willing to take a risk on a new product idea or a startup company. Contrary to what many believe, not every company that is lacking funds is doing badly. Often a company does much better than they expected and they do not have the money to fill all of their orders. A big part of being able to run a company smoothly is being able to get your hands on the money your company needs when it needs it.
Profit is great, of course but you also need cash flow!
In business, time is of the essence. When an opportunity presents itself; you, as the company leader, need available money to take advantage of the moment. If you, an entrepreneur, has to go searching for money and begging for funds your window of opportunity will usually close before you can grasp the brass ring.
Every company, especially e-commerce companies need to have a certain amount of money on hand just to operate. You should also have access to a substantial amount of funds that you can get instantly in case of emergencies. Then there are those rare and special occasions when Lady Luck un-expectantly smiles on you.
To seize the moment and be in a position to score big, when the right set of circumstances suddenly presents themselves, wise business pros make sure they always have funds that they can get to quick and use at their own discretion. If you wish to be a big business personality you need to understand finance. Business people that have at the snap of their fingers, large amounts of money command respect. People listen closely when they know you have big money backing up your words.
Often you do not have to even spend your money; just having lots of money will get people coming to you with ideas and profitable opportunities. It gets difficult to compete in big business arenas without first having your finances and funding in healthy and strong order.
Let’s look at how companies raise funds…
Company bank Loan: A company borrows what money they need from a bank and signs a contract to pay the money back over time with interest.
Personal Loan: Owner of the company borrows the money personally, usually from a bank. The owner then has to pay the lender back based on the conditions of the loan. Generally there are monthly payments for a set amount of years and interest is paid so the lender makes a profit. Collateral is put up to secure the loan which is personally owned by the borrower not the company thus it is called a personal loan. The owner then puts the money borrowed into the company for the company to use. The company of course will at some point pay the owner back the money he or she loaned it.
Borrowing from Friends or family Members: A Company owner may ask someone he or she is familiar with and on good friendly terms to lend them the money for a company project. Usually owners can borrow money easier from friends and people that know and trust them than they can from institutions like banks and other lenders. A company owner can get a much lower interest loan from an uncle or wealthy Mother –In-Law than they can from a banker but just know you are putting your personal relationship at risk when you borrow money from a friend or relative.
Before borrowing from someone whom you know personally, ask yourself if you can handle having the lender pestering you for repayment constantly. How will you feel if something goes wrong and you cannot pay the loan back to a friend on time? Many friendships have ended due to borrowed money not being paid back timely!
Line of Credit: Wise company leaders make all of the arrangements to borrow money, way before they ever need it. You can negotiate a line of credit much better if you have no use for the money at the time of negotiations. The goal with setting up a line of credit is to have funds on hand, just in case. Once approved for a line of credit you only make payments if you actually use the money. You can take the money with no explanations, at will, because the line of credit is there for your usage at your own discretion.
The terms and interest rates are usually much better than with other loans because at the time of ask for your line of credit, you were in no real rush to secure a loan. You were preparing for the future, planning so you have access to funds when opportunity knocks.
Borrowing Using Credit Cards: Desperate business owners that are having a tough time getting a much needed loan approved may turn to maxing out their personal credit cards to fund their business projects. This is not recommended by most financial experts since the interest rates on paying back credit cards are much higher than regular interest rates paid when borrowing through more traditional loans.
When a company owner needs money fast and they cannot wait the time it takes to go through the normal loan approval process, using one’s credit cards seems like a fast fix. You get the money NOW. There are no hassles or hoops to jump through because your credit cards are already approved for use. Often the business person needs to max out a few credit cards to reach the total amount of money they need for their company’s project.
Maxing out your credit card balance won’t cost you anything if you have cards that do not charge interest until you do not pay what you borrowed back by the end of the month. So if one plans to have the all the money come in to the company before the first credit card bill comes due to be paid on then you could in effect borrow, very short term without any cost. Just know that if you do not pay all the money back before interest kicks in then your credit card bills will be very, very high indeed.
Corporations and companies can sell stock to raise money: When borrowing from banks, lenders and generous friends and relatives is not a good option, a business can sell its company shares of stock to raise funds. The main reason a company owner would resort to selling stock is that the money does not have to be paid back.
Just remember that you are selling a portion of your company. Many owners opt for selling a small percentage of stock because if you retain ownership of 51% of the company stock then you have the majority interest and the biggest say in how the company is run. Your vote still outweighs all the other stockholders votes combined so your say goes.
In effect, if you keep 51% of the stock you are still running things. Bear in mind though, that all stockholders do share in the company profits. People buy stock in your company because they want to make money. A stockholder’s profit comes from dividends paid when the company performs well. When the company does good financially all stockholders share equally per share of stock owned. Buy more stock and you make more money but each share pays the same amount whether you are CEO or another officer of the corporation an employee or just an investor that is not involved working at the company at all.
Investors purchase company stock usually not for the dividends but more so, they are betting that the value of the company stock goes up so their stock keeps getting more valuable and thus if or when they do sell their stock they will make a nice profit. While they own the stock the dividends are a nice perk that many do not cash in but instead just keep reinvesting by automatically purchasing more company stock with it. In this way an investor is actually buying a bigger and bigger piece of the company as time goes by. The investor keeps getting wealthier as long as the company keeps doing well and reporting profits each fiscal quarter.
Stockholders can sell their stock, cashing out at any time. They usually do so when they identify a company that they think will give them more for their money. Stockholders put their money into companies that they think are going to grow and prosper. The idea is to get in when the company is young and the stock price is low and then holdout hoping for a bright future when the company and its stock are going to be worth a lot more.
Reinvesting Company Profits: Put the company profits back into the company to be used for expanding operations and growing the business is perhaps the most preferred way of funding on going company expansion. If your company is running strong and profiting steadily then you can forego having to secure and repay back high interest operational loans by simply leaving your profit in the business. Reinvesting in the company, using your profits to develop new products and services or to enter into a new market, keeps the company progressing without borrowing. But of course you have to be running the company on all cylinders to have profit to reinvest.
IMPORTANT: The goals with borrowing are always to keep the interest rates low and the loan terms as favorable to you and the company as possible. You do not want to have to put your house up for collateral for a company loan if you do not have to! Of course lenders want to make a profit when they loan money to you and your company. Lenders also want to assure they will get their money back.
Negotiating good loan conditions usually requires experience or the assistance of a good accountant, lawyer or funding specialist with a record of consulting for your company’s industry and the type of loan you are seeking. Lenders may take into account what you wish to use the borrowed funds for so they may want to see a formal plan stating how you intend to use the money. They will usually want to see your financial statements for the past few years.
Remember that companies that are doing well get loans approved faster and with better terms than poorly functioning companies. Personal borrowers too that have great credit scores due to good bill payment histories will be offered better loan conditions at lower rates.
All Companies Need Money to Operate. You must get good at finance because there will be times when money is tight. You may need to borrow money, for instance, to get you through an economic slump. An important machine may break down and need expensive repairs. A large customer may be having problems paying your bill on time. You might want to take advantage of a volume discount supplier’s price. Assuring you and your company have money to use when money is needed is very important almost as important to the future of the company as not spending money frivolously.
It is harder to borrow at the time you really need the money and it is stressful to be in that position. Therefore, make the time to get your finances in order and secure funding and commitments for funding well before the time comes that you actually need the money. Be proactive! Plan ahead!
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