“Where is the best place for a business to borrow money?”
This was a question on Facebook posed to the Carpenters Talk Group, which is part of the Builders Talk Group Family.
He needed $30,000.
He got some interesting answers, ranging from, ‘Hang some doors for a week and you’ll be fine’ to ‘Ask your Dad and phone him, and some legitimate finance providers.’
They are all valid options.
I thought I’d explore the topic because the real answer is — it depends.
Now, all businesses, including trades businesses need money from time-to-time. It’s hard to grow without investing. Some lucky business owners make enough enough profit that they can save it up and use it, the rest of us have to borrow it.
So, it depends (where the best place to borrow money is) on a few things.
- What is it for?
- What are your circumstances?
- How much you are prepared to pay?
- How desperate are you?
Some options to borrow money
I’ll start with the cheapest.
*Disclaimer: I’m not a financial adviser, this is not financial advice. You should get some from someone qualified. This is my view and not advice.
a) The cheapest finance is borrowing money from someone you know — Dad or Mum or someone. It might sound silly but this is really common way to source money for your business. (I’m assuming you don’t have money of your own to lead the business. You can do this, of course).
b) Next, cheapest is to borrow money as a secured loan. If you own a property you can often borrow more against the property, perhaps personally, then loan it to your business. You’re talking mortgage interest — 4% in AUS, less in the UK at the moment.
This really applies if you’re buying an asset like a vehicle or tools. Finance companies will often secure the loan against the asset. It costs more than a loan secured against property because it’s less safe — it’s hard to lose a house. 7% — 10% is common here p.a.
Personal loans or business loans (depends on how good your personal or business finances are as to which you might get) can be secured or unsecured will cost 13% or more. You borrow it and pay back.
3. Credit Cards
You can credit card personally or for your business.
Interest rates vary from 15% — 22% and feel they are good for a few tens of thousands because they are a faculty rather than a loan you pay back, it’s easy to get paying it off. Beware.
4. Invoice Financing
There are specialist finance companies that will secure short term loans against your invoices. Say, you invoice $100,000 a month, they’ll give you 80% of it straight away (as a loan) then the rest when your invoices are paid.
You can get hold of more money than with a credit card or a personal loan but it’s eye wateringly expensive and more addictive than crack. I’ve heard 3% fees (every month or every invoice, not per year) and other charges as well.
It sounds awfully expensive but it has a place. If you’re growing and your customers take time to pay, the money you’ve owed grows as well (your Accounts Receivable). You still have to pay everyone, of course, so you have to find the money from somewhere.
I think they are your main options, aside from selling shares in your business to an investor (who could be anybody). There could be a cheap or an expensive way to get money — it depends on how well it goes.
Borrowing money is expensive. Consider the cheap options first but understand the risk is on Dad or you and that’s why it’s cheaper.
The more risky the loan is for the lender, the more they’ll sting you.
Always think hard whether you need the money, or need to borrow or if there are other alternatives.
And of course, talk to your advisers – your business coach, your accountant, your financial controller.
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