Businesses in all types of industries have one thing in common: They all need money to be able to operate. There isn’t a business in the world that doesn’t need money to do things like purchase inventory, hire additional employees, buy equipment, or pay for an office. When a business doesn’t have enough money on hand to handle expenses, they can use business financing to keep their business going.
What Is Business Financing?
Business financing is a way for business owners to access money to be able to pay for things like temporary cash flow interruptions, expansion projects, inventory and equipment, and seasonal spikes in activity. There are several different types of business financing available and some types of financing are better for some purposes than others.
Types of Business Financing
Small businesses play a vital role in the economy, but they often struggle to get business loans from banks. To help encourage the growth of small businesses, the Small Business Administration (SBA) partners with lenders to partially guarantee loans to small businesses. There are several different types of SBA loans, including 7(a) loans, which can be used for many different purposes, CDC/504 loans for major purchases like real estate, and disaster loans.
One way to receive financing for your business is by selling shares of it to investors. This is known as equity financing. Equity financing can come either from an individual investor or an investment firm. When you choose equity financing, the people or firms that invest in your company become part owners.
Many businesses need a little extra money to handle a temporary, short-term need. In these types of situations, business owners often don’t want to be paying off a loan for years after the original need for the loan has been resolved. Short-term loans offer business owners a way to get the funding they need without having to deal with lengthy loan applications and long repayment terms.
Unsecured Business Loans
Many types of business loans require a valuable asset be used as collateral to secure the loan, but many businesses don’t have the types of assets lenders look for and the business owner might not be comfortable with using personal assets like their home or vehicle. Unsecured loans are a type of business loan that does not require the borrower to put up an asset to be used as collateral.
Not all business expenses require a big loan and businesses seeking smaller loans are often turned down by banks because they aren’t seeking enough money. To help fill the gap, many lenders have started offering microloans, which are loans in amounts that are much smaller than traditional business loans and come with shorter repayment terms. Microloans can be a good option for newer businesses or businesses that either have low credit scores or have never received a loan from a bank before.
When you have to wait for customers to pay their invoices, you have less working capital available to cover your day-to-day business expenses. While your customers may appreciate not having to pay immediately, it can cause problems for you if you need that money to take care of your business. Invoice factoring allows business owners to turn their outstanding invoices into money they can use right away by selling those invoices to a third party, known as a factor, at a discounted rate. The factoring company then collects the full amounts of the invoices from your customers.
Invoice financing is another option similar to invoice factoring. The difference between the two is that while invoice factoring involves selling your outstanding invoices, invoice financing is a loan based on the value of your invoices.
All types of businesses need equipment, whether it’s desks and computers or specialized tools and machinery. Although many types of general business loans can be used for equipment, some loans are specifically intended to be used for purchasing equipment. Since equipment loans can be secured with the equipment itself, borrowers do not need to provide any extra collateral.
Merchant Cash Advance
If a business that typically has a high volume of credit card transactions needs some extra funding fast, one way to get it is through a merchant cash advance. Technically, a merchant cash advance is not a loan, it’s a purchase of future receivables from your credit card revenue. Since this is a transaction rather than a loan, they are an option for businesses that have a hard time getting traditional business loans because of their business credit score.
Business Line of Credit
No matter how careful you are about managing your company’s finances, unexpected expenses can happen to anyone. To make sure they’re ready to handle any unpredictable expenses that might come up, many business owners like to have a business line of credit available to them. Unlike a loan, which can only be borrowed against once, a line of credit can be borrowed against multiple times and you only pay interest on it when you use it.
Just like starting any other kind of business, becoming a franchisee takes money. You’ll need to pay for things like equipment, a location, marketing expenses, and inventory, not to mention your franchise fees. A franchise loan can help you get the money you’ll need to get started.
Real Estate Financing
The right location can make a big difference in the success of your business, but most businesses aren’t able to pay for a real estate purchase all at once. Instead of taking out a mortgage the way a person would to buy a house, businesses have many different real estate financing options available to them, such as term loans, commercial real estate loans, and SBA loans.
Do you have a warehouse or storeroom full of inventory? Inventory financing is an option that allows you to use your unsold inventory to get the capital you need to help your business handle temporary, short-term cash flow shortages.
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