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E-Myth – “Why most small businesses don’t work & what to do about it”

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Outsourced CFO | Looking To Win With a Great Loan?

Outsourced CFO | effectively using business loans

29% of failed businesses will cite that they ran out of cash within the first five years of their business says outsourced CFO. Helping business owners understand how to use business financing to help them avoid running out of cash, can make a huge difference to all business owners, helping them overcome this common problem. When considering business loans, business owners should ask themselves some questions to help them make as informed decisions as possible.

The first question that business owners should consider says outsourced CFO is asking if it is easier to finance operating capital or hard assets. It is infinitely easier to obtain financing on hard assets over operating capital. It is much easier to obtain loans on hard assets, especially for a start up business. When considering business loans, entrepreneurs should take into consideration that the essence of their business will be much easier to finance than operating capital. Financing assets can be a benefit to businesses by freeing up is much cash as possible for the entrepreneur.

Another question that business owners should take into consideration when obtaining business loans is: is it easier to finance hard assets on the initial purchase, or after acquisition? Outsourced CFO says it is much easier to get approved for loans on hard assets as early on in the business as possible and if at all possible, with the initial purchase of the business. The reason for this is as businesses operate, they have the potential for running into a cash crunch, and that cash crunch means risk to the bank. It is much more advantageous for business owners to get loans as early on in the process as possible.

The third thing that business owners should take into consideration, is knowing the difference of processing time between business loans compared to personal loans. Most business owners have experience with personal loans when they purchased their house, and think it is a similar process. Nothing could be further from the truth says outsourced CFO, as buying a business is significantly more complicated than buying a house. The bank needs to not only understand the business completely, they also needs to understand all of the risks involved in operating the business. They may require additional information such as environmental assessment reports or formal appraisals of the business. A very typical timeline that a business owner can expect is 60 days as minimum threshold, or longer if more additional information as required says the CFO.

The helping business owners understand the differences between financing operating capital and hard assets, how early they should apply for loans because of the length of time needed to approve loans, as well as when in the business cycle they should finance hard assets, they can increase the success rate for getting loans, and getting those loans as quickly as they need in order to positively affect their business. By leveraging business loans in their business, business owners can free up cash in their business and avoid one of the most common reasons for business failure.

Outsourced CFO | effectively using business loans

One of the reasons business owners have said that their business failed was that they ran out of cash says outsourced CFO. Business owners can help avoid this common problem, by learning how to use debt as a tool, rather than believing that all debt is bad. By making good decisions about business financing, business owners can use financing as a tool to increase cash flow.

Because business owners often think that debt is all bad, they try to avoid financing they are hard assets and believe that leasing is a better option for them. While leasing assets can be a decent secondary choice to obtaining financing says outsourced CFO, financing should always be attempted first. If financing is not an option, be careful while considering leases. The reason for this is because lease rates are not always the same as what they are advertised to be, or additional financing charges are added on at the very end of the process, making it more expensive than the business owner was anticipating.

If the business owner is able to obtain financing for hard assets such as equipment to operate their business, vehicles and even their building, they will then be able to use the cash that they have personally, as their operating capital. By not financing hard assets, business owners use more of the cash that they do have on their assets, which can put them at risk of running into cash flow problems earlier says outsourced CFO.

Something else to have a business owner understand when considering financing, is understanding interest rates and amortization periods. Many business owners think that a low interest rate is the most important factor and that would be the CFO. While a low interest rate is a good thing to consider, something else to consider as well is the amortization period. A shorter amortization period is less attractive, even if it comes with a low interest rate because the shorter amount of time a business owner has to pay back the loan, means the sooner they may run into a cash crunch in their business. If there are unable to pay that loan back quickly, they will run into problems. The business owner should consider a much longer amortization whenever possible, even if the interest rate is slightly higher. By being able to get the correct amortization period for their business, will help business owners stay cash flow positive throughout the length of their business.

By understanding business finances in this way, the business owner can make good decisions, using debt as tool to help them stay cash flow positive in their business, understanding that business debt is not always a bad thing says outsourced CFO, and what debt is the best can go a long way in helping business owners avoid while most common problems that businesses fail in business today.