SECURE FINANCING: Definition, Principles & Best Easy Guide

Secure Financing
Credit: BusinessCollective

Being an entrepreneur can be stressful, and while you may have successfully launched your brand, you may be struggling financially, and we all know that financial assistance is required to keep your business running or to grow it. But even though today’s business loan market is pretty flexible, there are still some things you need to do right if you want to secure financing and the level of financial help you want. In this post, we will learn how to secure business financing and all you should know.

How to Secure Financing for a Business

When it comes to starting a successful business, the adage “you have to spend money to make money” applies. But what if you don’t have much—or any—money to spend? Knowing how to secure financing for a business is critical, whether you need start-up funds, a cushion, or capital to expand.

Ways to secure financing for your small business:

#1. Understand your options

Before you do anything else, educate yourself on the most common ways to secure business financing. Self-funding, or “bootstrapping,” is sometimes a viable option for entrepreneurs. Saving at least $5,000 is ideal, but using resources such as your home’s equity, your 401(k), or personal credit cards is generally too risky. There are three primary funding options: debt financing, equity financing, and mezzanine financing.

#2. Determine what you need

Determine a concise reason for requiring a business to secure financing. How much will you require, what will you use it for, how long will you require it, and when will you be able to repay it?

#3. Determine your financial capability

Calculate your debt service coverage ratio, or DSCR, to get a sense of how much financing you might be able to get. Divide your periodic cash flow, like your monthly capital inflow, by your loan payment for the same period. Understand that lenders typically require a DSCR of 1.35 or higher.

#4. Develop a business plan

Hire a professional CPA to help you with this. When planning your strategy, don’t forget to give your brand a personal touch to make it more appealing to lenders.

#5. Community Development Finance Institutions (CDFI)

CDFIs are private institutions that provide low-income earners, small businesses, and disadvantaged communities with affordable lending options and funds.

Although CDFIs consider businesses with good credit scores before granting access to secure financing, their approach is more considerate than that of most traditional banks, which reject many startup businesses due to low credit scores.

#6. Crowdfunding

Crowdfunding is the process of getting money for a business project from a lot of different people through online platforms. The advantage is that you don’t have to seek capital from a single investment source or individual, but can instead cast a wider net.

Crowdfunding platforms such as Kickstarter, Indiegogo, and Crowd Supply are popular. Kickstarter raised over $5.6 billion in business financing for 197,425 tech and creative business projects in January 2021.

#7. Grants

Grants are provided by the government and institutions that support the government’s vision by providing funding to businesses that meet certain criteria. To receive the funds, grant recipients must agree to the terms and conditions. Grants from the government can be found at Grants.gov.

Grants are technically free, but they are more competitive, take time, and can be a long and slow process. Before you spend a lot of time filling out applications, make sure your business meets the requirements for available grants.

#8. Micro-financing (MFI) 

Microfinance institutions make loans to individuals and small businesses who do not have access to traditional banks or who do not meet the requirements for conventional bank loans. It’s also known as a “microloan” or “micro fund.”

#9. Peer-to-peer financing

Peer-to-peer lending, also called P2P lending, is usually done through finance platforms that put entrepreneurs in touch with people or businesses who are willing to give them the secure financing they need. P2P lending provides funding without the use of a middleman or third party. Lenders and recipients conduct business directly. Lending Club, Prosper, and Funding Circle are examples of P2P lending platforms.

Secure Financing Before Buying a Car

One of the most common mistakes people make when buying a new car is failing to factor in the cost of auto-secured financing. Taking advantage of your enthusiasm, the dealer tricks you into putting $0 down and extending your car loan term from three to four years to keep monthly payments low. That may appear to be a good deal on paper, but you’ll end up paying $3,000 more in interest alone.

#1. Check your credit score before you go to the dealership 

The first step to securing financing before purchasing a car is to review your credit report and score. Credit Karma allows you to do so right now and for free. Dealerships frequently advertise very low-interest rates on new cars: 2.9%, 1.9%, and even 0%. They save the fine print for the fact that these rates are only available to car buyers with the best credit—those with a credit score of 750 or higher.

#2. Search around.

Begin by doing some research. You can accomplish this in one of two ways. Go online to compare rates, where you don’t have to enter as much personal information, or call several lenders and request quotes. The more quotes you request, the more likely it is that you will receive a competitive rate. Obtain quotes from at least three lenders.

#3. Explore the dealerships

Dealerships can be transparent about their financing options, so once you have a quote, you can check the websites of any dealerships you are interested in to see what kind of rates are available. If the dealership offers a low rate, take it back to the lender you’re working with and see if they can beat it.

#4. Obtain preapproval

The next step in securing financing before buying a car is to secure preapproval from the lender offering the best rate and terms for your needs. This will allow you to walk into the dealership with an offer in hand, giving you, even more, negotiating power.

#5. Bargain for the best possible deal.

Once you’ve been approved for financing, it’s time to shop around for the best deal. You can easily accomplish this by walking into several dealerships with your preapproval documents in hand.

Reasons to Secure Financing Before Buying a Car

You have a better chance of getting the best deal if you arrange financing before visiting the dealership.

#1. Favorable terms

You can get an idea of the interest rates, loan terms, and monthly payments you will qualify for based on your credit score before you walk into a dealership. When you know what rates you qualify for, you can go into the dealership knowing you’re getting the best deal.

#2. Reduced stress levels

Sitting down with a lender, either virtually or in person, before visiting a dealership can reduce the amount of stress you feel when the dealer presents you with financing options. If you can do some research and find the best loan terms for your situation, you will be better prepared to negotiate and make an informed decision than if you are pressured into something on the spot.

#3. You’re well prepared

Arranging secure financing before buying a car can make it much easier to make a good decision. You’ll have a better idea of which vehicle makes the most financial sense once you’ve secured financing, and you’ll be shopping based on the total cost rather than the monthly payment.

What Should You Do If You Can’t Secure Financing Before Buying a Car?

If you can’t get a loan before going to a dealership, that doesn’t mean you shouldn’t go. You can request to speak with a salesperson about getting financing. If you still can’t get financing from the dealership, you might want to think again.

Rather than taking out a bad credit auto loan or visiting a “buy here, pay here” lot, it may be better to work on improving your credit and lowering your debt. There are numerous ways to improve your credit, but they all take time. Begin by obtaining your credit report and reviewing it for possible errors. After that, you should focus on paying off your current debts and lowering the amount of debt you have compared to your income as a whole.

Why Finance is important?

Financing is essential in any economic system because it allows businesses to purchase goods that are out of their immediate reach. To put it another way, financing is a method of leveraging the time value of money (TVM) to put future expected money flows to use for projects that begin today.

What are the 3 major areas of finance?

Finance is made up of three interconnected areas:

  • Money and credit markets, which deal with financial institutions and securities markets
  • Investments, which focus on both individual and institutional investors’ decisions
  • Financial management, which entails making financial decisions

Conclusion

Securing the right type of financing for your business is critical to its success. If you intend to start a business, finding financing becomes more difficult because you may require flexible funds that can be used in a variety of ways due to the industry’s constant evolution. There are numerous ways to obtain the secure financing you require to run a successful business, and because each offers unique benefits, it is critical to carefully consider your options before deciding which one is best for your business.

References

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