If you’re a small business owner looking to grow your company or if you simply need help covering day-to-day operating costs, you may be considering borrowing money. Particularly if you have limited or erratic cash flow, you’re probably acutely aware of what you could do with additional funds. But as you consider your next steps, you’ll also want to think through the cost of borrowing, including interest, fees and the size of your repayments.
Keep reading to learn about different ways to lower your overall borrowing costs.
Calculate how much you need — and can afford — to borrow
The amount you borrow doesn’t just affect how much you’ll pay in interest and fees, it also affects the size of your payments, which can impact your monthly budget. As a first step, carefully consider exactly what your expenses are, how much you owe on existing loans, whether you have any outstanding debts or vendor payments and how you plan to use the money you borrow. You’ll also want to take a hard look at your cash flow to make sure you can afford the payments and overall cost of borrowing — without leaving you worse off.
But how much you borrow is only part of the puzzle. It’s also important to think about how you want to borrow, and why.
For everyday or fluctuating needs, consider a credit card or line of credit
With a low-interest business credit card, you can take advantage of flexible borrowing while keeping your overall borrowing costs low. A credit card can be a convenient way to preserve your spending power when your cash flow is uncertain, because you don’t need to pay off your balance every month. And with a credit card with a low interest rate, you’ll owe less interest on the balance you carry over.
If you’re unsure about which credit card is right for you, shop around to compare potential annual percentage rates (APR), fees, rewards and other perks. Even a small percentage point of difference in your APR could save you a considerable amount of money over time, and the right kind of rewards might help you save money on travel or pay down your balance more quickly.
Some business credit cards also offer additional support to cardmembers. For example, with a CIBC bizline® Visa card, you can manage your expenses and cash flow online with their financial tracking tool, making for a more seamless way to keep tabs on where your money is going.
A line of credit works similarly to a credit card. You’re approved for a credit limit, against which you can borrow as needed. However, a line of credit typically comes with an end date, after which you must repay your entire balance. A line of credit may come with a lower APR than a credit card or some loans, but the repayment term can be relatively short, so you’ll need to be prepared to make those payments when the time comes.
For one-time capital expenditures or debt consolidation, consider a loan
If you’ve got a single large expense to cover, it may make more sense to borrow the funds up front through a loan, as loans typically have lower interest rates than credit cards and lines of credit.
- A secured loan: A secured loan is backed by some form of collateral, which is usually something you own, like a house, car or your physical business, so you reduce the amount of risk a lender is taking on. A secured loan may come with a lower APR, although the lender could take your collateral if you can’t repay the loan.
- An unsecured loan: If you don’t want to risk losing your collateral, you may prefer an unsecured loan. You and your business typically need to be in a strong financial position to qualify for an unsecured loan, and your APR may be higher.
- Debt consolidation: If you have several high-interest debts from starting your business, you may want to consider debt consolidation. Essentially, you pay off your existing debts by taking out one new loan at a lower interest rate. Particularly if your credit has improved or your business is making more money than when you took out the original loan, you may be able to secure a better rate.
- Government-backed loans: You could also look into loans for small businesses offered by the Canada Small Business Financing Program.[1] Business loans that are backed by the government may offer lower interest rates because the government shares the risk of the loan with a lender.
When it comes to taking out a loan, it’s especially important to know how much money you need from the very beginning, because you’ll owe interest and fees on the entire amount you borrow, not just the amount you use. And, a higher borrowing amount may also mean higher monthly payments.
Take steps to lower your borrowing costs
When you’re thinking about borrowing money, it’s important to remember that you have to pay back what you owe plus borrowing costs. Being thoughtful about exactly how much your business needs, looking into a low-interest credit card, improving your credit score and comparing different financing options could all lead to significant savings over time and help you invest more money in your business in the future.
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Name: Sonakshi Murze
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Email: sonakshi.murze@iquanti.com