Financing

How to Manage Your Borrowing Costs

There are many reasons why a business might need to borrow money. Perhaps you want to build your inventory in anticipation of a seasonal demand. Maybe you are looking to upgrade your computer systems, invest in new equipment, or conduct renovations.

Whatever your reason, there are strategies you can employ today to borrow wisely and manage your costs. These include developing a solid business plan, protecting your business credit rating, and choosing the right type of financing.

Plan today for tomorrow’s needs

Map out your success. A business plan has many practical uses, such as providing your business with strategic focus, setting out measurable goals, and selling your business vision to backers, management, and employees.

A business plan can also help you anticipate whether and when your business will need to borrow, the amount of financing you’ll need, and how to allocate it. This will give you the time to work with your small business banker to secure the right financing at the best rate.

Apply for credit in good times.When you’re planning on expanding your business, it’s often a sign that your operations are going well. This can help you secure a better borrowing rate.

Indeed, some businesses may opt to borrow for an expansion even if they already have the cash to cover the cost. This frees up cash for unexpected expenses, while the anticipated revenues generated by the expansion cover the loan costs. Your business banker can help you decide if this strategy is right for you.

Applying for your business and personal lines of credit when times are good can also help you get better rates.

Borrowing tip. You may be able to use the equity in your home to lower your overall borrowing costs. This strategy can be suitable for smaller or home-based businesses, and even for business owners who want to borrow personally to invest in their larger enterprises. Your accountant can help you decide if this is appropriate for your situation.

Put overdraft protection in place. Overdraft protection for your business account has many benefits. It can provide you with peace of mind, help you save on unnecessary fees, and protect your business credit rating.

Review your credit history. Contact a credit bureau at least once a year to check that your personal credit history is accurate and up-to-date. With identity theft on the rise, this can be a smart move. A good credit rating may come in handy when you need to borrow cash.

Your options for borrowing
Here are some of the many borrowing options open to your business.

Business credit card. This may be a good choice for smaller purchases or paying off suppliers. Take advantage of your card’s grace period — you may have up to 26 days after making your purchase to make your payment.

Line of credit. A line of credit (sometimes called an operating loan) can be a very useful tool for small businesses. One of the advantages is its flexibility: once you are approved for a maximum loan limit, you can draw on the money anytime you need it, without having to apply again. And you pay interest only on the amount you draw on. In addition, rates are competitive compared with other business solutions. Having a line of credit in place can help cover short-term needs, such as financing inventory and receivables, and can be used for emergencies. Making arrangements for a line of credit before you need it is a much more efficient way to manage your cash flow than trying to take out a loan in a hurry.

Term loans. These loans are used to purchase the fixed assets of a business, such as equipment or store fixtures. The amounts borrowed will depend on what is being financed. Term loans are usually repaid monthly, based on the expected lifespan of the asset being purchased.

Lease instead of buy. Consider leasing a piece of equipment or computer system instead of arranging for a loan to buy it outright. This will help you free up some cash that can be used for other business-building efforts, such as marketing or staffing. Your accountant can help you decide if leasing is best for your situation.

Borrowing tip. Match your business financing to your goal. For instance, use long-term financing, such as a term loan, for longer-term purchases such as a piece of equipment. Keep your credit cards and operating line of credit free for shorter-term needs. Speak to your business banker about the steps you can take today to manage your borrowing costs tomorrow.