Every business owner’s journey is unique, but there is one universal experience: finding small business funding. Whether it’s to assist with cash flow or support operational costs, weather the storm through a slow season or expanding for growth, owners need to acquire cash to support their business goals.
The options for business funding vary greatly from loan amounts to repayment terms and interest — and allow you to choose an option that aligns with your needs and helps drive your small business forward. So how do you obtain capital to help run your business? And what can you do as a small business owner to increase your chances of getting it? Let’s explore the basics of business funding so you’re empowered to take the next step in your entrepreneurial journey.
How Are Businesses Funded?
Other than personal funding sources, there are two main ways to fund your small business: equity and debt. Equity is an exchange of partial ownership in return for cash. Typically, there isn’t an obligation to repay the funds because they are “paid for” through the ownership terms.
The other option is debt, typically a small business loan. Unlike equity, you don’t have to sacrifice any ownership of your business, but you are obligated to meet the terms of the financial agreement.
What Do I Need To Get Business Funding?
Every lender and product are unique, so there isn’t one perfect formula to guarantee access to small business capital. Approval ultimately comes down to a lender’s confidence in your ability to meet the repayment terms of the agreement. Nevertheless, there are actions you can take to help boost the lender’s trust in you and improve your financing options.
Write Your Business Plan
Some lenders require applicants to share a business plan. Even if they don’t, having one prepared demonstrates your organization, leadership and preparedness. It also provides context for the specific funds you’re requesting.
Know Your Credit Score
Your credit score is an unbiased way to summarize financial trustworthiness and informs the terms of funding you qualify for. Most lenders will look at your business credit score as well as your personal credit score.
Organize Your Books
Clean up your balance sheets, cash flow statements, income and loss statements and any additional operational documents. Lenders usually review your financial statements and accounting records. Any conflicting information or disorganization may make them question your finance management.
What Types of Business Funding Are There?
Various types of small business loans are available, and not all loans are created equal in terms of what will be the best fit for your situation. The right option for you will depend on the needs of your business, your desired repayment schedule and what terms you qualify for. Here’s a list of the most common funding types.
Term Loans
When you think of a traditional business loan, you’re probably picturing a term loan. You’d receive your funds in one lump sum and repay it on a predictable schedule (varies by lender and qualifying rates and terms).
Term loans help your cash flow with no surprises or large costs up front. If you end up needing more funds, you may be able to reapply for a second loan. Also, your lender may discount the unpaid interest and pay off the existing balance.
Small Business Line of Credit
A small business line of credit is a revolving source of funding and allows you to draw the funds you need when you need them. Your limit is based on a credit check, much like a personal line of credit or a credit card.
A business line of credit provides access to capital on an ongoing basis, making it easy to replenish your inventory, onboard a new employee and more. You may benefit from a line of credit if you need to refinance your existing debt, and depending on your current funding situation, the interest rate may be lower and help you pay off other loans at a lower rate.
Equipment Financing
Equipment acquisition is a crucial component of business growth. You can streamline organizational efficiency, automate your systems, and expand your operations by making new investments. However, businesses might not have the financial capability to keep pace with the ever-changing industry. Fortunately, equipment financing will bridge the funding gap and help you meet your business goals. The term refers to a financial instrument or a line of credit for a company to purchase tools and machinery to meet its evolving needs, boost productivity, improve workers’ safety, and reach new markets.
Commercial Real Estate Loans
Commercial mortgages help business owners buy or refinance land or a building used for business. In most cases, commercial mortgages operate based on a fixed-rate loan. This means the interest rate will remain the same throughout the term of the mortgage, instead of changing as the years pass.
Taking out a commercial mortgage can give you the financial freedom to buy a new building, or release equity from an existing ownership. A commercial mortgage can also help you to extend, upgrade, or refinish the building. To capitalize on new opportunities, a commercial mortgage can help you purchase a new location. By purchasing or refinancing your commercial property, you can take steps to improve your business, or utilize the building's equity to pursue new opportunities.
Merchant Cash Advance
A merchant cash advance (MCA) is not a traditional loan. In an MCA transaction, businesses sell their future/current receivables to the funding company at a discount. The funds you receive are based on the future revenue of your business and are assessed as a factor rate.
With an MCA you’ll always know the total amount you will have to deliver to the funding company. No new receivables? There’s no absolute obligation to repay. MCAs are best for business owners with immediate funding needs. While an MCA’s range can vary, funding generally ranges from as low as $5,000 up to $300,000.
Small Business Administration Loans
A Small Business Administration (SBA) loan is a long-term financing option provided by a federal agency called the Small Business Administration. The SBA does not directly fund loans. Instead, they work with banks and private lenders to deliver a guaranteed portion of the loan.
Most SBA loans have longer repayment periods with the added benefit of lower interest rates (5% – 14%), and SBA loans don’t have early repayment penalties or fees. If you’re able to pay it off sooner, you may be able to save more money in the long run.
Venture Capital
This form of private equity is sourced by investors looking to get in at the ground floor of an up-and-coming startup. Investors are typically experienced with these types of business opportunities and are supported by a firm or an investment bank. As with traditional types of equity, most investors expect a stake in the company.
How Do I Know What Type of Business Funding Is Right for My Small Business?
There are two key things to consider when deciding what type of funding you chose to help finance your business: the product and the lender. Chose a product that provides sufficient access to credit and a repayment structure that reflects how your business operates. Most importantly, apply for business funds that appropriately cover the true loan amount you need.
In addition to multiple business funding products to choose from, there are also several different types of lenders that can provide you with a business loan. For example, you can work with a large commercial bank, a local community bank, a direct online lender, or a peer-to-peer lender. Each type of lender will offer diverse products and have different requirements for borrowers. Some lenders place value on good credit while others care about annual revenue. Carefully researching various business loan providers and their requirements before putting effort into an application will give you insight into which lenders you’ve got the best chances of qualifying with.
Comentarios