The Ultimate Guide to the Different Types of Business Financing
Entrepreneurship
Starting and growing a business almost always involves spending money. More importantly, it typically involves spending more money than you have in your bank account. Expenses you’ll incur as an entrepreneur range from marketing campaigns to employee salaries and more. You probably don’t have enough cash to cover them all, especially when you’re just starting out. There are also many expenses you may not anticipate right away. Don’t assume you can rely on your own funds simply because you have enough financing to start your own business now.
If you’re starting any sort of business, you need to seriously consider your financing options. Each is somewhat unique. You’ll get the best results if you take the time to conduct proper research.
Get started with this guide. It covers the major types of business financing options you might use to secure small business funding. They include the following:
Business Loans
Traditionally, a business owner seeking capital may approach a bank or similar lender to acquire a loan. This requires providing the lender with documentation indicating you’re a responsible individual who will pay back a loan on a consistent basis.
Term loans, which are lump sums you will usually pay back over the course of one to five years, aren’t necessarily easy to qualify for. A recent survey indicates small business owners seeking term loans from banks qualify for them less than 20% of the time. Additionally, as with most business loans, this option involves paying interest on your capital.
That’s why you might wish to pursue a short term loan instead. The amount of capital you’ll be provided with is smaller than what you would get from a regular term loan, and the period of time you have to pay it back is shorter (usually between three and 18 months), but qualifying for a short term loan is much easier. However, with interest rates that can reach the triple digits, they are expensive.
SBA Loans
Lenders take a risk when loaning money to new business owners. That’s the main reason they are often reluctant to do so; they don’t want a lendee defaulting. That said, the government wants businesses to succeed. When a small business owner thrives, they can hire more employees, stimulating the economy.
This is where the Small Business Administration comes in. The SBA doesn’t loan money itself. Instead, it works with lenders to guarantee a large portion of a loan, reducing their risk.
While this is certainly a worthwhile option to consider, it’s important to understand that the SBA doesn’t want to take unnecessary risks either. You’ll need to provide thorough documentation proving you are capable of paying back your loans if you choose to go this route.
Business Line of Credit
A business line of credit is not a lump sum. Instead, it gives you revolving access to a certain amount of capital (ranging from $10,000 to greater than $1 million). Unlike a traditional loan, you only pay interest on the capital you draw from your line of credit. Payment terms are flexible, as are usage terms, and you can often qualify quickly even without fantastic credit.
Business Credit Cards
When starting a business, it’s important to separate your business finances from your personal finances. A business credit card allows you to do this easily. As with any credit card, though, you should only consider using one if you believe you’ll be able to consistently pay off your balance. They can help you build credit if you’re responsible, or they can significantly harm your credit score, making it difficult to acquire future funding
Merchant Cash Advance
A merchant cash advance is another option that’s relatively easy to qualify for regardless of your credit. That said, they can be very expensive with high APRs. You’ll pay off your loan by allowing a lender to receive a portion of your daily credit card sales. This option may be ideal if you need immediate funding, but you should carefully consider the expenses before deciding there is no other viable approach.
Equipment Financing
Do you need an expensive piece of equipment in order to run your business successfully? If so, lenders may be willing to provide equipment financing if you can indicate why the revenue the equipment would generate is greater than its cost.
You’re required to pay back the cost of the equipment in monthly installments (with interest). However, lenders also typically require business owners to put up other assets as collateral when agreeing to equipment financing. If you can’t make your payments, they may seize the collateral.
Investors
Angel investors are people who invest money in your business for a share of ownership. In some cases, they also provide advice to new business owners.
Venture capitalists are similar. The main difference is that, while angel investors tend to be individuals, VCs are teams of investors. They provide funding in various rounds, with the amount of equity they receive increasing with the amount of funding they provide.
You can also turn to family and friends if you’re seeking investors. While “qualifying” for such an investment may be relatively easy, you should remember that you’re essentially agreeing to deliver results that make investing in your business a worthwhile risk. If you fail, you may put a significant degree of stress on a personal relationship. Don’t pursue this option without considering this first.
Additional Methods
Many online lenders are more willing to approve loans than traditional lending firms. Thanks to the Internet, they have access to data beyond a credit score and general financial history, making it easier for them to determine if an applicant is a safe bet. You may want to consider these if traditional lenders have turned you down.
You can also launch a crowdfunding campaign via a platform such as Kickstarter. This is a smart option to consider if you’re not sure whether there will be enough interest in your business for it to succeed.
Again, this is merely a basic guide to business financing and funding. You need to thoroughly research your options before deciding which best suits your needs. When you invest enough time into this process, finding the right source of funding becomes much easier.
