Managing borrowing costs

It’s important to understand how to borrow wisely and manage your costs.

It’s important to understand how to borrow wisely and manage your costs. Strategies include developing a solid business plan, protecting your business credit rating, and choosing the right type of financing.

Here are some tips to help reduce the expenses associated with borrowing money.

Managing borrowing costs

There are many reasons why your 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.

Every growing business needs money. Whatever your reasons to apply for financing, use these common-sense tips to get the funds you want at rates you can afford.

Plan today for tomorrow’s needs

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 when your business will need to borrow money, the amount of financing you’ll need, and how to allocate it. Completing or updating your plan will give you 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.

Sometimes it’s a better option to borrow for expansion, even if you have the necessary money saved. 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. Be sure to negotiate for your preferred borrowing rate.

Put overdraft protection in place.

Overdraft protection for your business account carries numerous benefits. It can provide you with peace of mind, help you save on unnecessary fees (such as accidentally writing a check that exceeds your available balance), 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.

Know your borrowing options

Business credit card

This may be a good choice for smaller purchases or paying suppliers. Take advantage of your card’s grace period — you may have up to 25 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’re 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.

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 arrangement 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 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 equipment or computer systems 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 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.

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