The world of business financing can be complicated and confusing to navigate for business owners. It can be difficult to wrap your head around all of the different options and what you actually need for your business. In this guide, we will go into depth about the various funding solutions available to small-medium-sized businesses like yours. We will help you unravel the fancy jargon of the most common types of financing options and the sources to really understand each product. Financing is the backbone of businesses, it can make or break your cash flow- so it is important to understand what options are available to help your business grow and flourish to its full potential.
Common Types Of Business Financing
When you think of the word “loan” you may think of going to a bank in person and speaking with a loan officer, pitching your idea with documents, and waiting for weeks or even months to hear back. If one T isn’t crossed or one I isn’t dotted, you can get rejected with an impact on your credit. Making it even harder to apply for another loan. Although there are advantages of traditional bank loans if you are the picture perfect candidate, it’s good to know that there are now more options than ever. You can even skip the arduous processes of the past and get funds for your business within 24 hours of applying. One of the biggest mistakes you can make for your business is not exploring all of the options available. Depending on your business needs, you can go with traditional term loans, but you can also use revolving lines of credit for your business, or even equipment financing made available specifically for your business. Here are 9 types of options you can consider next time your business is in need of capital:
1. Term Loan
The classic, the ole reliable term loan. A business term loan is commonly used for expanding operations or financing projects. Term loans usually have long repayment periods, typically 10+ years, which allows companies to repay their debt over an extended period of time. They are provided by traditional banks and other financial institutions. The terms and conditions of these loans can be tricky depending on the lender and the applicant’s credit. Term loans require good credit scores, and often need collateral to protect themselves in the event of the business not being able to pay their loan.
2. Short-Term Loan
Similarly, you have the option of going with a short-term loan. A short-term loan is an arrangement where a business receives funds that are expected to be repaid in a brief period of time. Typically under a year, or sometimes as short as a few weeks. The purpose of these loans is to cover immediate expenses. Business cash flow can often be unpredictable and its gaps are sometimes inevitable with the current turbulence of market conditions across the country. Short-term loans are usually more expensive than longer-term loans depending on the financial institution and other factors such as cash flow and the merchant’s creditworthiness.
3. SBA Loan
The Small Business Administration (SBA) is an organization within the government in the US that provides support to small businesses. SBA loans are made specifically around the needs of small businesses and can be used for expansion, working capital, equipment purchases, and more. These are great options for small businesses who qualify as they usually have favorable terms, longer repayment timelines, and competitive rates. They are provided by lenders that partner with the SBA, the SBA backs these loans reducing the risk for lenders to provide SBA loans for small businesses that may not be able to go the traditional route.
4. Business Line Of Credit
A Business Line of Credit (LOC) is a flexible financing that allows a business to use only the funds that they need. It operates much like a revolving line of credit, the key feature is that the business has a credit limit and can use whatever amount of credit they need within the set limit. The business has the ability to borrow as much or as little as needed, typically having a variable interest rate, and usually having no fixed term for repayment. This makes the business line of credit a great tool for managing short-term cash fluctuations with minimal risk as the business only pays interest on the amount borrowed. This makes it a versatile and cost-effective form of financing for businesses.
5. Invoice Factoring
Nothing worse than working with clients who don’t pay on time. If you face this problem with your business, invoice factoring may be the product for you. Invoice factoring is when a business sells its outstanding invoices to a specialized firm known as a factoring company. In return, the business receives an upfront payment, usually a significant portion of the invoice value, allowing for immediate access to capital. The factor takes over the responsibility of collecting payments from the customers listed on the invoices. While this practice offers a quick infusion of working capital, it typically comes at the cost of a factoring fee or discount, which the factoring company deducts once the customer pays the invoice. Invoice factoring is particularly beneficial for businesses grappling with late-paying customers and seeking a more predictable cash flow.
6. Equipment Financing
Equipment financing is pretty self explanatory. It is a financial solution tailored for businesses that need technology or equipment without causing a financial strain on their cash flow. The equipment itself serves as collateral, allowing companies to secure funding to purchase or lease the necessary assets. This approach not only conserves working capital for other operational needs but also enables businesses to spread the costs over time, aligning with the useful life of the equipment. There are also some potential tax advantages, making it an attractive product for businesses that rely on equipment for their growth.
7. Merchant Cash Advance
A merchant cash advance (MCA) is a type of financing option where a business receives capital in exchange for the purchase of its future receivables. Instead of a traditional loan with fixed monthly payments, repayment is typically made through a daily or weekly deduction from the business’s credit card sales or bank account deposits. Merchant cash advances are often sought by businesses that need capital fast, as leading funding companies are able to provide you with funds the same day you apply. In addition to speed, another appeal of this product is that depending on the financial institution you work with, this funding can have no impact on your credit, require no collateral, and provide easy approval.
8. Debt Consolidation
Debt consolidation is a great option for businesses that are overleveraged with their payments to lenders and funding companies. Typically, this is when a financial institution pays off your balances from other sources and gives you additional capital on top of that or just lowered payments to help you free up some cash flow. The financial firm adds its own fees or interest on top of the price your business has paid for the current funding it has, so although it does assist with cash flow day to day, this comes with a price as well.
Sources Of Funding For Your Business
There are various sources of funding available for businesses, each with its own advantages and requirements. Picking a source of funding is simple once you understand your options. Some common sources include:
- Small Business Administration (SBA): The SBA loans are government-backed loan programs that provide favorable terms and lower interest rates to small businesses. These loans are provided by participating banks and financial firms.
- Traditional Banks: Traditional banks are what you think of when someone says “bank”. Banks like Bank Of America, Chase, and Citibank are just some of the hundreds of traditional banks around the U.S. They offer a range of loan options, from term loans to lines of credit, often with competitive rates. However, these banks have strict qualifications for a business loan and longer approval times.
Alternative Financing Companies: These include online lenders, other non-traditional financial institutions, and growth partners. They often provide quicker approval processes and cater to a broader range of business. Alternative financing firms have their own criteria to approve funding for businesses that don’t just focus on credit. They will often look more into cash flow, outstanding receivables, leverage, and other factors. These companies often do not require collateral or impact your business credit.
The landscape of business financing provides diverse options to cater to the unique needs of every business. From conventional loans to equipment financing or alternative solutions such as merchant cash advances, there are so many resources available for your business to thrive and grow. Whether you lean toward established sources like traditional banks or opt for more flexible alternatives offered by financing companies, comprehending these sources is pivotal for ensuring your business’s financial well-being and success. Have further questions about your financing options? Reach out to Tiger Capital Funding.