Business strategy

Small business financing: Navigating the options

Small business financing: Navigating the options

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Running a small business includes all sorts of challenges. One of these challenges is undoubtedly obtaining financing for your business.  Whether it’s for working capital, buying equipment or for expansion purposes, financing is a must rather than a nice to have. Luckily, today more than ever, business owners have various financing options to choose from. The issue is that with so many options is that choosing the right one for your businesses can be confusing. In this post, we will examine the different options available to small business owners and try to make sense of it all. Keep an eye on our blog for future posts in which we will dive deeper into all the various small business financing options.

The 7A Small Business Administration (SBA) Loans

The SBA program offers a couple of lending options to help start you off.  Since the SBA services businesses and not individuals with loans, the requirements for receiving one are contingent upon factors related to both the business and the individual owners. The primary factors in receiving a 7A loan are based on location of the business, the owner’s character and the business’ cash flow outlook.

Note that an SBA loan is only an option for companies that are identified as small businesses rather than startups. They must meet the requirements that can be found here.

Merchant Cash Advances

This financing option is an alternate way to secure funding for a small business that does not qualify for a bank loan. If a business has steady cash flow but is in an immediate need for lump amount (e.g., for buying equipment) this is a viable option. With this type of funding, the lender is entitled to collect a set percentage of a business’ future credit card sales. The business continues to repay based on this percentage until the lender fully recovers the amount loaned plus any premium.

Peer to Peer Lending

Peer-to-Peer (P2P) platforms connect borrowers with private investors who contribute capital and create syndicates for loans. Originally, these platforms targeted and served consumer borrowers; however, most recently, some of the platforms have started serving small businesses as well, while other new platforms are exclusively dedicated to small businesses.  P2P loan rates are typically competitive with rates of banks and intended for business owners with good credit history.

Crowd Funding (AKA Crowd Financing, Crowd Sourced Capital)

Utilizing this strategy to obtain funds is rather new. The idea behind crowd funding is to raise capital in small amounts from a great number of individuals to finance a business. As opposed to P2P lending, crowd funding is not a loan but rather an investment. By utilizing social networks to reach people who are tied to you in some way, crowd funding can potentially increase the amount you secure by going beyond traditional lenders and reaching family, friends, acquaintances and colleagues.

Equipment Loans

Securing a loan of this type depends on your credit rating, business history and the value of your equipment. This is a streamlined alternative that allows you to finance the total value of business equipment such as faxes, copiers, computers, vehicles and/or any other type of equipment you might need. The term of the loan is based on the equipment’s life expectancy.

Accounts Receivable Financing (AKA Invoice Financing, Factoring)

This is not a loan, but rather an alternate way to secure financing that is based on your accounts receivables (i.e. your outstanding invoices).  In this financing structure, a business would sell part or all of its outstanding invoices to a factoring company at a discount of the invoices face value.  The business’ customers would then remit the payment on the invoices to the factoring company at the invoices due date. It is a relatively easy way for business to receive immediate cash without taking on further debt, but you should understand how to choose a factoring company.

Editor’s Note: Bluevine provides a new type of Invoice Financing. It is the fastest and easiest way to get your invoices paid. Get paid now.

Purchase Order Financing

This form of financing allows a business to secure capital based on purchase orders, when it cannot meet demand for those orders. It is a solution that relieves the burden for businesses that are not in possession of working capital to complete its orders.

Alternative (Term) Loans

Alternative Term Loans are provided by private companies (instead of banks) and are extended to businesses based on factors such as credit rating, cash flow and a great number of other considerations. There is a set time allotted for repayment (number of payments) and the loans come with variable or fixed rates. The repayment duration can range anywhere from three months to ten years with monthly payments, weekly payments or other options depending on the provider’s specific offering.  The benefits of alternative loans are that the requirements are usually much less strict than that of banks and timing for getting the loan can be as short as a few days.  The negative aspect of alternative loans is that their rates are usually much more expensive than that of a bank.

Acquisition Loans

Acquisition Loan is a form of financing which can be secured for a specific purpose, within a short time frame, and one where its purpose is stipulated in the agreement before the loan is actually granted. The use case is here is when the business typically is short on liquid capital and wants to purchase a specific asset. A business can get better terms in this type of loan compared to a regular term loan since the secured assets have a value and serve as collateral.

Home Equity Loans

Being qualified for this loan is contingent upon a business owner’s equity in their home (the value minus what is owed). This is a type of loan that is extremely flexible and offers lower rates than traditional commercial loans.

However, the downside is that you are putting your home ownership at risk; if your business goes sour or if you fail to keep up with the terms of the loan, you may lose your house to foreclosure.

Traditional Bank Financing

Last but not least, you can try to get a credit line or term loan at the bank. When possible, bank financing is the option of choice for most small businesses. Banks almost always provides the best rates and paying back is very convenient since the business already has an account with the bank. When applying at your bank, your company’s cash flow, asset liquidity and collateral will be scrutinized. You must know your businesses’ finances in all aspects, and your business plan must be solid and sensible. It also doesn’t hurt to have some sort of relationship with someone at the bank.  Unfortunately, most small businesses today do not qualify for bank financing and have to rely on other alternative financing methods such as ones mentioned in this post.

Small business financing is always evolving with more options becoming available all the time. You can learn about one of the latest solutions that can help your business fill short-term cash flow gaps here.