Millions of businesses are launched every year, and they range from tech companies to restaurant businesses. The challenge, however, for this businesses is getting capital to stay operational, especially in these tough economic times. The manner in which you finance your business can determine its success or failure. Luckily, if you intend on getting financing for starting a business and or growing your business, there is an amplitude of sources that offer financing. A lot of entrepreneurs have tapped into these sources, and they have seen their businesses grow into successful ventures. This article will outline some of the most common sources of business funding.
If you need financing to grow your business, a bank loan is a viable alternative. A myriad of small businesses have benefited from this source of financing. Bank loans, however, require businesses that have a good credit. Regardless, banks have for long served as the most common source of debt financing. Banks can offer businesses from short-term to long-term financing. If you qualify for a bank loan, you can receive asset financing and working capital to keep your business afloat.
Before you receive financing from a bank, they require proof that you can repay the full loan amount as per the agreement. This means that your business has to generate adequate cash flow to cater for the principal loan amount, and the loan interest alike. In order to obtain financing from a bank, you are required to present personal guarantees plus a personal asset as collateral for the amount you will receive. The best part about getting business financing from a bank is that you receive loan amounts relative to your credit status. Also, these loans have some flexibility, such that you can repay the full amount sooner and ax the loan agreement.
For those businesses that don’t have good enough credit to obtain bank loans, SBA loans are a good option to get financing. These loans by the U.S. Small Business Administration are open to all types of small business. If you are an entrepreneur looking to source financing from an SBA, there are a couple of things you have to put into consideration. Call them qualifications. To qualify for this type of loan, your business has to meet the U.S. government’s definition of a small business within your industry.
Moreover, the SBA cannot guarantee financing to your business if it can get the money you need by itself. They require you to apply for a loan from a bank or any other traditional lender and get disapproved. You’re applying for other terms that your business has to meet according to the type of loan. After it is established that you meet all the qualifications for an SBA loan, you are required to apply for a business loan from a financial institution that deals with SBA loans. This is a necessary process because the SBA doesn’t offer loans directly.
Accounts receivable funding/ Factoring
If you are looking for some cash to expand your business operations or cover your day-to-day business expenses, you may want to consider factoring. So, how exactly does it work? Simple, businesses sell their invoices to a factoring company in exchange for fast cash. You can use the money you get to increase your inventory or pay some of your employees. This is a reliable source of funding because some of your customers may be late in making their payments, which leaves you in a difficult position, especially when you have a lot of expenses to handle.
Unlike traditional lenders such as banks, this source of business funding ensures that you get your cash in the shortest time possible. You can even get it in under a day. Factoring, however, is limited to business and government clients- those that have strong credit. This is because the factoring company wouldn’t want to go through the trouble of not getting paid by your clients. Regardless, this is a very effective source of funding that allows you to free up some working capital enabling you to expand your operations. Interestingly, it is an unsecured source of funding. No collateral is required.
Who are angel investors? These are the small group of investors or sole individuals that invest in the business by making an equity purchase. This is one of the most common methods of equity financing. When investors purchase equity in your business, you can receive the funding you need plus advice on how to grow your business. They also bring with them their expertise, which is essential for the success of a small business.
Take note that getting an angel investor is not as easy as it sounds. The investors need to verify that your business has the potential for growth. After all, no one would like to jump ahead into a sinking ship. These investors also demand to see a viable business plan and exit strategy as well. The investors use these to determine whether there will be a return on their investment, and the profits they should expect to get. Usually, this type of business funding has a lifetime of about five years. If you deem this as a viable option for your business to acquire funding, you need to ensure that you seek legal advice. A lawyer will guide you on how the equity sale should be conducted.
Business loans and lines of credit
Another alternative for businesses to get funding is through business loans and lines of credit. With a business loan, the bank provides your business with some amount of money, which is to be fully repaid after a couple of years. On the other hand, a line of credit gives you a revolving facility. Your business can use it whenever you need some money, but you have to repay the amount on a regular basis. A line of credit works more or less like a credit card.
With this type of financing, however, you have to be aware that the bank holds its interests paramount. Therefore, before you get access to this source of funding, the bank has to assess your cash flow to determine your ability to pay. This means that you can only get funding if your business has an outstanding performance in generating money. Your business is also eligible for this source of financing if you have assets. This option is hardly used by small businesses and startups that have zero or little experience. Nevertheless, businesses can rely on it to cater for limited cash flows.
Online alternative lenders
Getting loans from banks and other traditional lenders for your business can be hard because of weak credit. As such, a new generation of online alternative lenders has sprouted to offer small businesses with the cash they need to get going. If you decide to go for this source of funding, there are some important details that you shouldn’t miss. One, these loans are more like bank loans. Despite their similarity to bank loans, they charge high-interest rates. They, however, disregard credit scores.
Compared to bank loans, they have a quick turnaround time and require little effort and documentation to apply. This source of funding can help your business improve its credit score- a very good incentive. Moreover, they have fixed monthly payments, but this requires your business to have good credit. Overall, they offer to finance for working capital, purchasing inventory, refinancing, and expanding business operations.
If you have a poor credit or have no credit history at all, you don’t have to worry about getting financing. Amidst all the sources of business, funding is microloans. Microloans usually feature small amounts, and banks don’t bother with such. Micro lenders offer them. Non-profit organizations that have different operating criteria that traditional lenders.
These type of loans have more flexible terms plus they require little documentation. Microloans, however, charge high-interest rates, and they offer loans ranging from $500 to $35,000. If you are looking for a microloan, numerous micro lenders all over the U.S. can help you meet your business’ financial needs. Usually, these loan are ideal for startup businesses. They are also helpful to entrepreneurs who would like to purchase a piece of equipment that will increase production. Generally, microloans are an effective source of funding that help businesses cater for minor, but necessary operations.