Contributed by Benjy Feinberg, CEO of Behalf
More funding options mean harder decisions
Today, businesses can access extra capital in more diverse ways than ever before.
Overall, that’s a great development for small businesses.
Yet, these expanding alternatives demand a more sophisticated decision-making process of how to borrow capital. Every borrowing decision requires that you look into the structure of repayments, APR, additional late fees, and any extra conditions in the tiny print of the terms and conditions.
As your options grow, so do the dangers of non-sustainable borrowing. The first step is to understand those implications on your business credit, future financing capabilities, level of debt, and business relationships.
Responsible borrowing grows your business by:
1. Building your business credit score
For the most part, each time you take out a business loan or credit line, that transaction is reported to one of the credit bureaus. Each financing opportunity can potentially raise (or lower) your credit score.
While you may think of qualification for larger scale loans as a sign of creditworthiness – or financial stability – using them may not be in your best interest. You’re committing to a lengthy period of repayments, which could put your credit score at risk should you approach a slower season.
When lenders begin to judge your ability to pay back, either through your credit score, or through alternative data, they’ll see your repayment behavior as a reflection of your responsible borrowing.
2. Helping you qualify for higher levels of future funding
What’s most important, especially in early stages of your business, is that you build up a good financial reputation by utilizing a responsible amount of credit that you’re confident you can pay back.
By starting out the learning process of the cash flow cycle of your business with smaller chunks of financing, you’ll get a better feel of how much working capital you need at a time – and how often you can and want to pay it back.
In doing so, you’ll be building up your credit score with each on-time payment. By choosing shorter-term financing, you’ll increase the speed with which you can boost your credit. Down the road, when you really need a bigger chunk of financing, you’ll have a better chance of qualifying once you’ve attained a higher credit score.
3. Protecting you from a never-ending cycle of revolving credit
Credit cards and banks offer small businesses revolving lines of credit, meaning a limit of available credit that individuals and corporations can borrow from, repay, and then withdraw again for an undefined period of time.
On the surface, this seems like a convenient way to take out money as you need it, especially for operating costs.
Because the credit card company or bank earns interest on the money borrowed, they incentivize you to continue “revolving” your credit, accumulating more and more debt, and paying more and more interest. This can lead to a never-ending cycle. You can get so stuck that you need to take out another revolving loan to pay back the first one!
In order to avoid this risk, responsible lending models provide incentives to both sides (borrowers and lenders) for on-time payments. On one side, the borrowers can build their credit score and qualify for higher credit lines with each repayment. On the other side, the lenders earn interest primarily on the number or frequency of loans, as opposed to late payments.
Setting realistic goals keeps your relationships strong
In the perfect business world, everyone would always be paid on-time. In reality, though, cash flow problems create ripple effects on your business relationships – involving both your suppliers and your employees.
So, the next time you use small business financing, think beyond the cost and terms of the capital – to the implications of your small business funding on the growth and long-term financial health of your business.
Behalf provides SMBs simple working capital lines enabling them to bridge the gap between vendors’ terms and their ability to generate revenue from their purchases. Behalf pays an SMB’s vendor invoices of up to $10,000, and the SMB pays Behalf back over up to 120 days, at lower than credit card rates.
SMBs receive favorable rates and terms, while vendors gain rapid cash flow, lower risk of fraud, fewer credit losses, and increased sales.
To learn more about how you can use Behalf to pay 1-800Accountant, or your other vendors, click here.