No matter the industry, all businesses need money to operate. Funds can be used toward business needs such as equipment financing, hiring additional employees, buying equipment, or paying for an office. However, when a business doesn’t have enough money on hand to handle expenses, it can use business financing to continue operating.
What Is Business Financing?
Business financing is a funding option 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, but each type of financing may be better for some purposes than others.
Types of Business Financing
Traditional Bank Loans
When considering financing options, many business owners turn to traditional bank loans as their initial financing choice. This type of loan can prove to be a slower and more difficult option for business owners. The application process requires a credit inspection, a business plan/industry risk and collateral. Additionally, approval can take as long as 30 days or more, even if the business has good credit and provides collateral.
Although small businesses play a vital role in the economy, business owners tend to struggle to get approved for bank loans. To encourage the growth of small businesses, the Small Business Administration (SBA) partners with lenders to partially guarantee small business loans. 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.
Differing from traditional lenders, one way to receive financing for an existing business is by selling shares of it to investors. This is known as equity financing, which can come either from an angel investor (a wealthy individual who helps fund startups) 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 with high interest rates for years after the original need for the loan has been resolved. Short-term loans offer small business owners a loan option with fewer monthly payments to get the funding they need while avoiding lengthy loan applications and long repayment terms.
Many lenders require a valuable asset to be used as collateral to secure a loan during the application process. 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 large loan amounts. 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 have loan amounts that are much smaller than traditional bank loans and come with shorter repayment terms. Microloans can be a good option for a new business or businesses that have low credit scores, no credit history, 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 in your bank account to cover day-to-day business expenses. While your customers may appreciate not having to pay immediately, this is the money used to take care of your business. Invoice factoring allows business owners to turn their outstanding invoices into money they can use right away.This is done 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 small business financing 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.
Whether it’s desks and computers or specialized tools and machinery, All types of businesses need equipment. 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.
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 is 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 a bad credit score.
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 from a financial institution, which can only be borrowed against once, a line of credit can be borrowed against multiple times and you only pay interest rate 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.
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. These options include 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.
Though far less traditional than other forms of financing, crowdfunding is a popular low-cost option for small businesses. Instead of taking out a loan or line of credit, businesses are funded by interested individual investors across the globe. Business owners can exchange their own goods and products for investments, and can start the process right on the internet. This method is a good choice for those who are starting a new business because it can bring in money without interest rates, deliver market validation and widen the scope of customers.
If your business requires funds that are flexible and terms that are shorter, a working capital loan may be the best option. This type of loan allows businesses to grow without the stress of spreading funds too thin. A working capital loan requires businesses to have a 500+ credit score, 6+ months in business and $15,000+ average monthly bank deposits to be considered for approval with Credibly.
How to Get Business Financing
The more prepared you are to apply for business financing, the smoother the application process will be. In order to increase your chances of approval for any of the financing options mentioned above, consider preparing the following:
- Tax returns
- Credit history
- Recent invoices and business transactions
- Pay off any outstanding debt, if possible
- Business plans
- Valuable asset collateral
Keeping these in mind, your business will be well on its way to being fully prepared to apply for the right financing option.
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