Responsible financing – the success of your business!

October 4th, 2019
Whether you are a small entrepreneur or a farmer, the word “financing” can give you a headache. When you’ve decided to take the next step, to move to another level of your business, you must rethink your financial flows.


Responsible financing, most important things you should pay attention to
What type of loan suits you?
Aspects to consider before taking a loan

Responsible financing, most important things you should pay attention to

A proper approach to the question “how do I finance my business?” and “where do I get funding resources” can be vital to the success of your business. A preliminary assessment can help you identify the right source of financing that can be either internal (self-financing) or external financing. In other words, an external financing means taking a loan from a financial institution such as a bank or non-bank financial institution. Each of the above mentioned has its advantages and disadvantages.

If the preliminary assessment shows that you cannot finance your business from your own sources, then you must get finances from external sources but not before making sure that you can afford external financing! We know that what you read may seem strange to you “how do I allow external financing, how can I not afford a loan?” These and other important issues regarding responsible financing will be discussed in the article below.

Before taking a loan, you need to do an analysis of your business. In most cases, you will be helped by a representative of the financial institution from which you want to borrow money. Together with a loan officer you will go through all the key aspects of your business, you will identify all the risks and also the opportunities generated by taking a loan. After analyzing your business, the representative of the financial institution will tell you what is the right amount of money that you can get for your business. This amount will be closely correlated with indebtedness of your business (the other debts you have), but also with the ability to pay, because you must be able to safely repay the loan. This way you will be helped not to get over-indebted what could “freeze” your business.

Another important aspect to consider is the destination of the loan. A loan can have several destinations: for working capital, for investment and mixed purpose loan.

What type of loan suits you?

The working capital loan helps you replenish your merchandise stocks, make payments to suppliers, pay salaries or state taxes, so this type of credit helps you get out of the financial jam and boost your business. It is a useful type of loan especially for traders who want to increase their merchandise stocks during periods of the year when sales are going well and existing stocks would not be sufficient. It is also suitable for businesses that due to some unforeseen expenses / investments have accumulated debts to the state or to suppliers, such a loan represents a solution for the financial deadlock.

The investment loan helps you especially if you are a small producer or farmer. They are intended for the purchase of cars, machinery, real estate, land or the setup of working points. This type of loan is granted for a longer term than working capital loan and is especially useful for entrepreneurs who want to invest in machinery, land, spaces, etc. which will lead to the development of the business and implicitly will generate higher incomes in the future.

Mixed-purpose loan is a combination of working capital loan and investment loan. This type of loan is intended for entrepreneurs who want to grow their business. For example, an entrepreneur has a small store in a retail space. He find out that the adjoining space is soon vacant and that he could rent it and arrange it to expand his shop / business. Therefore, this entrepreneur will need financial sources for the working point setup and supply of goods. In this case, a mixed purpose loan is a perfect solution for financing.

Aspects to consider before taking a loan

  1. Indebtedness
Don’t get over-indebted, before taking a loan, think carefully about what other debts you have. You may also have loans from individuals that are not declared and that the financial analyst cannot take into account before approving your credit application. If you overleverage your business, there is a risk of bankruptcy and we do not want this. Any financial institution wants to support entrepreneurs to develop and grow together step by step.

  1. The loan purpose
It is very important to choose the right loan destination. If you want to replenish your stock, you have to make a loan for working capital and not the one for investment. The difference between this two types of loans is the period of total repayment of the loan. It is advisable to make a calculation and determine how long you will need to sell the purchased goods and correlate their sale with the number of installments.

For example you bought 100 cell phones and you estimate to sell them in 9 months, then a working capital loan with 9-12 rates would be suitable. If you take an investment loan for 5 years to pay for the stock of goods, you could end up selling the phones in the first 9 months, paying the first installments and using the rest of the money obtained from selling the phones for other things that do not generate incomes. Thus you risk at one point to get unable to pay all 60 installments.

  1. The number of installments
As you read above, calculating the number of rates is a very important issue. You must avoid terms of loans which are far beyond the terms of the transaction for which they were taken for. In other words, if you estimate that the transaction will take 6 months, try to take a loan for a period of 6-8 months in order to return the money in time. If a transaction would take 6 months and you would take the loan for 24 months for example, you risk running out of money and not being able to pay for all remaining instalments because the loan period exceed the period of transaction which was generating income.

  1. The institution you borrow from
After you’ve made all your calculations and plans, it’s time to decide where to get money from! The most important issues to pay attention to are total interest – the cost of the loan or in other words, how much you will pay for the money you will use. Also, the flexibility of the repayment schedule and what are the conditions for an irregular repayment schedule. And last but not least, the institution from which you borrow.

Lending conditions differ from one institution to another, in some cases you can get very attractive and tempting offers, but you have to take into account one aspect, the costs related to the loans are important but more important is the relationship with the institution from which you borrow. You must also consider the readiness of the institution to come to your aid and support you with all the necessary information, to have effective communication with the institution so that you can remedy any misunderstanding that may arise during the loan period.

Also, avoid borrowing from unauthorized persons, if banks and other financial institutions cannot help you with a loan, it would be advisable to wait a little longer until you solve all your problems and make a loan application again. As well, you can negotiate with financial institutions again. Loans from unauthorized persons can have serious consequences. Keep in mind that there are financial institutions that are very flexible in evaluating loan applications, even if banks cannot give you a loan, there is a high probability that a non-bank financial institution will approve your application!

If you have read this article then you know how to finance your business responsibly. Share this information with your friends.

Good luck business development!

With kindest regards,
Mikro Kapital‘s team