Each small business is diverse and therefore has different borrowing needs. The credit card may provide all the finance for some while others could benefit from a line of credit/invoice factoring/discounting. Others could benefit from a grouping of all three.
In other words, there are no absolute rules. However, there are definite benefits and drawbacks in securing more than one type of finance simultaneously.
Benefits of Multiple Business Loans
Flexibility is a key factor. It is usually difficult to forecast when an individual would require borrowing. Customers may change, investment opportunities could occur suddenly, an unpredicted cash flow crisis could impact any business expansion.
If an individual has to access multiple sources of funds, then the individual could react quickly instead of applying for a new loan and waiting for a decision.
This could be the variance between success or failure if the individual is dealing with an unexpected shortfall in cash.
Another benefit is in terms of choice. If an individual can access multiple sources of finance simultaneously, it would be possible for the investor to use the most beneficial business loan at the most relevant time.
In other words, it is similar to having a revolving credit, which the concerned person can use and repay whenever needed. Again, the individual can spread the debt payments, generating a streamlined cash flow, instead of making sure that there is sufficient money to cater to a single, large repayment on a fixed date every month.
If one takes a huge amount of finance and critically, use it properly, it would improve the credit score.
Drawbacks of Multiple Business Loans
Firstly, one must consider the cost. If an individual has three types of financing, it would mean three different monthly repayments and the accompanying interest charges. At times, it would be difficult to meet all the commitments and may soon be looking at liquidation.
Secondly, it is often difficult for individuals to be prudent with their spending decisions. Having borrowing available could impact the investment decisions. Business owners who are unable to prevent a new financial commitment could be in serious trouble.
All types of business credit are not similar. Hence, the level of financial understanding is critical. Having an insight into the benefits and drawbacks of the various options would be useful.
By considering the various criteria, an individual would be able to decide if multiple sources of finance would be appropriate to take the business forward.