The most sought after types of small business financing are unsecured loans largely because most new and upcoming entrepreneurs often run small businesses with limited or no assets to use as collateral to qualify for most loans. The other reason is that the lender shoulders the entire risk of the loan depending on the type of loan, leaving the entrepreneur with more confidence to pursue rewarding commercial endeavors.
The popularity of an unsecured business line of credit paints it as one of the best loan products in the market, so if you are lucky enough to get it, you need to know how to manage the funds to avoid making the terrible mistakes some entrepreneurs make. Here are some tips to help you manage business money effectively to ensure constant cash flow and smooth operations in the business.
Borrow only if it has significant returns
A business line of credit is an open jar that a business can dip a hand into for funds when it needs to. The lender will charge an interest on funds used, therefore the business only pays interest on monies used. Just because it is available doesn’t mean you have to borrow, critically scrutinize the rewards of the project or expense and only borrow if it is profitable. This type of financing is different from say a working capital commercial loan which is asset based; it is an open source of funding that an entrepreneur must use to grow the business that you must explore.
Do not mix personal and business finances
This is among the most serious problems many small business entrepreneurs do not realize is explosive until it is too late. Considering that most businesses were started with personal savings or personal loans, or that because of how difficult it is to get an unsecured loan today, entrepreneurs find it hard to keep personal expenses apart from the business’ without realizing that any missed personal bill, exceeded credit limit and other small issues that affect a personal credit score will also affect the creditworthiness of the business and vice versa. Use the business’ unsecured commercial financing for business transactions as you pointed out in the loan proposal – NO EXCEPTIONS!
Effective cash flow management is crucial
Every successful entrepreneur must stay on top of things in the business and always be informed on what is happening. Every little thing affects the destiny of the business. Effective cash flow management encompasses many things including business planning, proper budgeting and market dynamics among others and it affects the business’ ability to pay bills and loan installments at the end of the month, stock or buy raw materials, customer loyalty, employee motivation etc. As a matter of fact, unless the business is expanding, effective cash flow management should keep the business off debts.
It is wise to apply for an unsecured business line of credit, but the hard work begins once the loan request is approved. Are you ready?