Franchise owners know that a successful business requires ongoing financing solutions. Having access to credit keeps a business on track from one quarter to the next. What some franchise owners may not understand is that different forms of funding are available. Some are better than others under certain circumstances.
Do you own a franchise? If so, do you know what type of financing model is best for your business? Understand that different financing models meet different needs. Sometimes your needs are short-term and limited. Other times they are long-term and repeatable.
Knowing this, it is not unusual for business owners to tap into multiple forms of funding. Today it might be a short-term business loan to help manage cash flow while your company chases down payables. A few months from now you might be in the market for a long-term loan to support your expansion goals.
Business Lines of Credit
The Fast Business Loans website compares a number of different financial products from a variety of lenders. Among the products they list are business lines of credit. A business line of credit is among the easiest forms of financing to get among existing businesses with a good track record.
A line of credit for business is similar to a line of credit secured by a homeowner on their property. This type of credit is considered unsecured in the sense that businesses do not have to put forth any collateral in return for borrowing. Business lines of credit also tend to be revolving. What does that mean? It means the business can continue borrowing and repaying indefinitely.
Let's say your business obtains a line of credit with a $50,000 limit. You can borrow up to $50,000 at any given time. Should you repay $10,000 next month, you now have $10,000 in credit you can access for future needs. Meanwhile, you continue paying down your remaining $40,000 balance.
If it helps, think of revolving credit as similar to a credit card. That's essentially what you're getting with a business line of credit. You are getting the ability to continually borrow up to your limit, in perpetuity, as long as you keep making regular payments.
Another common form of business funding is asset financing. As the name suggests, you borrow money based on assets put up as collateral. The lender funds your request based on the value of those assets. Of course, loan-to-value ratios apply.
Let's say your franchise is in the food service sector. You hope to expand from one franchise location to two. In order to secure funding, you put up all of your equipment as collateral. The equipment represents assets that back the loan. Provided it has enough value, the lender will loan you an amount equal to a certain percentage of that value.
Asset financing can be obtained using all sorts of assets. You could put up business equipment, real property, or even future payables. Flexibility is one of the things that makes asset financing so attractive.
Short-Term Business Loans
If business lines of credit and asset financing are not suitable, you can always take a look at short-term business loans. By definition, a short-term loan usually has a term of one year or less. However, some short-term loans can go as long as three years. The point is this: you are not obtaining a business loan that you intend to repay over decades.
The main advantage of short-term loans is that they are easier to obtain than their long-term counterparts. On the downside, shorter terms generally mean higher interest rates. This is due to the fact that short-term lending presents more risk to the lenders. They compensate for that risk by charging higher interest rates.
Note that rates and terms vary among lenders and loan products. In Australia, it is fairly common for short-term lenders to offer products with weekly or monthly payment plans. A weekly payment plan allows a business to spread its obligation over a larger number of payments, thereby reducing the cost of each individual payment.
Long-Term Business Loans
Last but not least are long-term business loans. These are loans requiring substantial amounts of money which you need many years to repay. Perhaps your business is looking to move to a better location. You need to obtain the land and build the building. You are going to need substantial amounts of cash to make it happen, and a long-term business loan may be your only option. The Bizcover website explains short vs long terms loans in detail.
Long-term business loans are conventional loans with attractive rates and terms. To get one, a business needs to have a solid track record. Quite a bit of documentation is required as well, including several years of annual statements.
Always Read the Fine Print
There are a few other financing models not discussed in this post. The point is that there are many options for any business owner to look at. The key to making the right choice is reading the fine print. If you are familiar with the old adage that says the devil is in the details, apply it to business financing.
A good example is found in comparing rates and terms. In the lending game, ‘rates’ refers to what borrowers pay in combined interest and fees. Lenders often advertise their products with annual interest rates. This is the amount of interest you pay on the outstanding principal every year.
As for terms, it dictates how long you will pay on the loan. This is where reading the fine print matters. Why? Because the length of the term influences the cost of borrowing more than the interest rate.
Let us say you borrow $50,000 at 10% for one year. Your total payback amount would be $55,000. If you were to borrow the same amount at 5% over five years, your total payback amount would be just over $56,600. You would ultimately end up paying more – even with the lower interest rate – because the term is longer.
Along those same lines are early repayment penalties. You might choose to repay what you borrow early in order to save on interest. But in the end, your savings might be wiped out by an additional fee tacked on to make up for the lost interest.
Your franchise needs ongoing funding sources to keep things on track. You need to decide which financing model is the best option. Truth be told, you will probably access multiple kinds of financing over many years of doing business. That is the way it works.