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13 Financing Options for Small Businesses

Financing Options for Small Businesses

Your small business might get the boost it needs from business funding to succeed (and sometimes survive). Business owners have a wide range of financing options available, and the qualifications required for each form of financing might vary. Costs also vary greatly.

You may obtain finance for your business by either taking on debt, such as small business loans from conventional banks, taking out short-term loans online and from other online loan lenders or by providing investors with equity. Your business’s eligibility, the reason you need finance, and how quickly you need it will all affect the best type of financing for you.

To help you discover a suitable fit, here’s a rundown of small businesses’ most popular funding options and information on how to get them.

What is business financing?

There are different types of finance available for businesses, including business financing, and funding from banks and lending institutions. Some financing options have a short-term repayment period of a few weeks or months. Financing expensive assets like real estate or machinery on a long-term basis is common. There are, of course, plenty in between.

13 most popular business funding options

Before choosing a loan, review the legal responsibilities required by each type of loan you’re getting.

Credit Cards

Businesses may easily make purchases with credit cards and then pay for those goods at a later time. There are several credit cards available for business use. Some of these provide rewards programmes where customers may earn miles, cash, or points. Make sure you are aware of the distinctions between personal and business credit cards if you want to utilize credit to finance your firm. It is essential to keep the two types of spending separately for accounting and tax purposes.

Remember that your credit score is important when applying for a credit card. Your approval rate will increase and your interest rate will decrease the higher your credit score is.

Overdrafts

An overdraft is an approved additional amount of cash (or “line of credit”) tied to your business transaction account that you may use anytime you need it. You pay back what you can, when you can, as long as the overdraft remains under the permitted limit. Interest is applied on the overdraft debt until it is fully repaid. Before approving a company overdraft, banks take into account several variables. These include the number of years you’ve been in the company, your annual revenue if you have ownership in real estate or other assets to use as collateral for the loan and the reason you require the money.

Business overdrafts come in two varieties: secured and unsecured. You put up property or another asset as collateral for a secured overdraft. Additionally, you are not required to put up security against an unsecured business overdraft. However, the bank will ultimately have access to your assets if your firm has difficulties and you are unable to make payments.

The interest rate is another distinction between a secured and an unsecured business overdraft. With a secured business overdraft, the bank secures the loan with collateral. The reduced risk means that the interest rate on secured overdrafts is lower. The interest rate on an unsecured overdraft is usually 1.5 times higher than for an unsecured overdraft.

Angel Investors

An angel investor is a wealthy person who lends money to entrepreneurs or small firms in exchange for stock in the business. There are benefits to working with angel investors. The money you receive won’t cost you anything. However, you give up some ownership and control of your company when you take funding from venture capital companies or angel investors.

Fully drawn advance

In essence, a fully drawn advance is a term loan in which the borrower receives the principal at loan origination and agrees to repay the principal plus interest by a preset amortization schedule. Depending on the requirements of the lender, the specifics of the completely drawn advance, such as whether fixed or variable interest is employed, may change.

Fully drawn advances are often structured as long-term loans, making them ideal for use as down payments for long-lasting assets like real estate or durable machinery. Fully drawn advances can be set up as unsecured loans or secured loans, where the collateral is a promise of the underlying asset.

 

The time of interest payments can also be further customized. Interest can be levied monthly, quarterly, semiannually, or even once a year, and it can be set or variable. Fully drawn advances may even be set up as interest-only loans with a single balloon payment for the principal due at the end of the period.

Cash flow lending

Cash flow financing is an unsecured loan that firms employ for day-to-day operations. The loan is often used to finance working capital, such as payroll, rent, inventory, and other expenses, and is repaid with incoming cash flows from your company. This implies that you will be borrowing against future revenues that you anticipate receiving.

It’s crucial to keep in mind that cash flow financing for businesses is different from typical bank loans, which need a considerably more extensive examination of the company’s financial standing, including credit history. Instead, your company’s ability to create cash flows determines your eligibility for cash flow financing virtually completely.

Small businesses that lack the necessary collateral for a loan, a track record of success, or a lengthy credit history typically employ cash flow financing. This means that the origination fee and interest rates will likely both be higher from the lender. Cash flow loans should always be repaid as promptly as possible since, if you start skipping payments, they might seriously affect your company’s financial standing.

Crowdfunding

Consider crowdfunding if you need to raise money from many individuals for your company. Various crowdfunding websites support new businesses. You publish a proposal on the platform outlining the amount of money you wish to raise as well as your reasons for doing so. Investors evaluate your proposal before deciding whether to fund your company.

Some systems for crowdfunding are incentive-based, which means you may give investors a price instead of paying them back. Peer-to-peer lending is another sort of platform where you may raise operating capital from the public. Like other loans, they must be paid back to the investors as well. To improve your chances of convincing others to invest in your business, look at effective crowdfunding campaign ideas.

Trade Finance

This is just for use in international trade. Your bank will promise to pay your supplier’s bank immediately when the seller complies with the terms of your transaction when you purchase stock or products from an international supplier. You, the buyer, will draught a letter of credit for your seller stating the terms and conditions of the transaction with the assistance of your bank. Your vendor can take the letter of credit to their bank to collect their money after they’ve sent the goods. This saves you from having to pay a large amount of money and from having to wait weeks or months for your things to arrive. 

Your bank is making the payment on your behalf with this loan. To be accepted, you must still fulfil the requirements set out by your bank. Trade finance agreements reduce barriers to international trade and carry little risk. They may be customized to meet your demands, and your bank can provide a wide selection of products that come under the category of trade financing. To get assistance choosing the ideal product, speak with your provider.

Microloans

A business microloan is a small loan, often between $100 to $50,000, available for traditional long-term company loans. These loans are often given to business owners who want startup funds for new small businesses.

Microloans can assist in starting and expanding a small business by paying for start-up costs or other charges like the acquisition of machinery, inventory, furniture, fixtures, and equipment as well as payroll or marketing. Microfinance can be utilized to get through periods of slow business.

Microloans for businesses often have a short term. The loan duration may last for several years, although it usually lasts for little more than a year. In many instances, microlenders provide their clients with more than just cash quantities; they also help them expand their businesses. Due to the small loan amounts and short repayment periods, microloans are more likely to be unsecured business loans, however, they may also be collateralised. 

Traditional Bank loans

The main source of business loans is banks, which is likely why you turn to them first when looking for a small business loan. Even though bank term loans are among the most affordable financing options, being approved for one may occasionally be challenging (especially if you have bad credit). This is because many of them demand excellent credit and more experience in the lending industry than do other lenders. However, if you are approved for a conventional bank loan, it may be a cost-effective solution to keep your cash flow in check or acquire capital for business growth.

You’ll need to know how long it will take to repay the loan, whether you decide to finance your business with a brick-and-mortar bank loan or get one from online lenders. Small companies frequently use one of three different forms of term loans, ranging from short-term loans (which might have a higher interest rate but get you funded quickly) to medium-term and even long-term loans. The bank should be able to assist you in locating a term loan that is priced appropriately for your budget, depending on how much you want to borrow and what your required monthly payment amount is.

Line of credit

A small business line of credit can assist owners of small businesses in maintaining constant access to capital to ease the ebb and flow of fluctuations in business costs and income. A line of credit allows you access to a set amount of money, which you may draw from, return, and borrow from again, as opposed to obtaining a fixed amount of finance as you would with a loan.

For businesses, a flexible lending option is a business line of credit. A revolving line of credit is another name for it. If you use a credit card, you are already familiar with a line of credit. It enables you to draw money from your credit line, repay some or all of it, and then draw more money from it. The business owner controls when, if, and how they will use the borrowed money using a line of credit.
SBA Loans

SBA loans are a type of business debt that is managed by the SBA (Small Business Administration) or one of its networks of authorized private lenders.

Some SBA loans are available that can be utilized to cover a variety of costs and offer set amounts at predetermined interest rates over predetermined payback periods. Other SBA loans also aid small business owners in making particular sorts of purchases, such as commercial real estate.

Invoice or Debtor Finance

Invoice finance provides businesses with working capital to enhance cash flow, pay workers and suppliers, and reinvest in operations and growth by providing short-term borrowing secured by outstanding invoices.

If you provide goods or services to other businesses, you could let them pay you later. These customers’ unpaid invoices may be converted into cash by a lender. A loan secured by your accounts receivable is known as invoice finance. Invoice factoring is a different variation in which the lender borrows funds from invoices that are due from other companies and then has the option to collect on the small business’s behalf. Be sure to thoroughly study your contract because invoice factoring and financing might be among the more expensive small business loan options available.

Small-business grants

Small-business grants give entrepreneurs a means to launch their companies or expand them without having to worry about paying back the money. Some grants, which are often provided through nonprofit organisations, governmental organizations, and companies, are targeted toward particular sorts of company owners or industries.

Small-business grants may be a terrific source of finance for startups and companies that don’t meet the requirements for conventional loan financing. Free financing has drawbacks because everyone wants it. Finding and applying for grants will require a lot of work, but investing time in looking for free money chances may be worthwhile in the long term.

How to choose the right financing option for your business

There are a lot of factors to consider when choosing a source of finance for your business. This include:

  • The purpose of finance. The finance managers of your company should match the available funding sources to the amount needed. Some financial institutions are often exclusively accessible for very specific purposes.
  • The repayment terms. Take into account how long the financing plan is intended to run. Shorter-term loans may have higher initial payments, while longer-term loans may accumulate a substantial amount of interest over time. Take into account the periodic payment’s size and the frequency of payments. Consider the proportion of each payment that goes to principal and interest as well; to reduce the overall long-term cost, choose loans with a higher proportion of principal payments.
  • The interest and fees. Before deciding on a financing option, tally up all the fees involved. Interest rates, origination fees, and broker fees are typical loan charges. Investment-based financing might have quite varied costs. For instance, money borrowed from venture capitalists might not need to be repaid for years, but when it does, the investor can anticipate getting their money back all at once at a hefty premium. A change in management and a change in the organization’s strategic direction may result from financing through stock offerings.
  • The requirements of the lender. Take into account the requirements that each lender and investor have for candidates. Go for funding from sources whose conditions you can fully satisfy. Credit score criteria and certain financial ratio tests, such as the debt-to-equity or interest coverage ratios, are examples of common financing needs. Before putting together a loan application package, talk with each lender about the demands made on applicants.

The Bottom Line

There are many ways to make money for your company. You can consider getting a personal loan, using the money in your retirement account, or getting a low-interest business credit card. Keep in mind that company funding should serve as a launching pad for success or a short-term fix for a problem. Come back to this list to evaluate what makes sense for you if your accountant and financial team identify a method for you to utilise finance to your benefit.

______________________________________________________________________

Author’s Bio: 

Marjorie Hajim

Marjorie Hajim is the SEO Manager for Friendly Finance. Friendly Finance is a leading loan matching service in Australia specialising in consumer finance. She loves growing businesses with a focus on their online presence and is passionate about organic growth and all things digital. 

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