Growing your small business takes more than a great idea and hard work. You will need funding for start-up and operations until your business is self-sustaining. Even then, there will be times when your business needs to purchase equipment or inventory but there isn’t enough cash reserve to make it happen.
There are many funding options available for small business owners, and by knowing the pros and cons of each, you can be more informed about which option to pursue. The type of situation or circumstance you find yourself in may also contribute to which solution is the most secure for your company.
Considering the Options
The best option for your financial needs often depends on the current state of your business and personal finances. During your initial months of setup, work to establish your business finances as separate from your personal accounts. This will be a long-term plan that benefits your business credit health. However, the early days of your company’s operation may find that some of these common financing options will evaluate your personal creditworthiness along with other factors.
Here are nine primary ways that small business owners can find funding for their venture, as follow:
- Traditional Term Loan. If you have a well-established business with a strong credit score, this option may be for you. The lending criteria are more difficult to meet, but the rates and terms are more favorable.
- Small Business Administration (SBA) Loans. If you are running a profitable business, you may be able to take advantage of the partnership between the SBA and prime lenders. Pending application approval, you could have access to a low-interest loan with convenient repayment terms.
- Business Lines of Credit. Established business owners who aren’t in need of long-term financial support, could benefit from a line of credit. This flexible working capital can be drawn as needed, and repaid according to the balance of funds.
- Business Credit Cards. If you are in start-up mode and there is no business history, a business credit card is useful for initial purchases and establishing your business credit score. Approval is used based on the owner’s personal credit history and score.
- Equipment Financing. For the business owner who needs to purchase expensive equipment and doesn’t have the cash on hand, this financing option is beneficial. It allows a business owner to take the equipment and use it while paying the loan monthly. The equipment acts as collateral for the loan.
- Invoice Financing. Also called factoring, this financing gives companies who invoice their clients access to cash while they are waiting on customer payments. A third party factoring company purchases outstanding invoices, for all or a part of the total balance, and then collects the debt directly from the company’s client. There is a fee involved, but not having to wait on funds can be a huge benefit to companies needing to purchase more inventory or materials.
- Short-Term Loans. There are many lenders who offer small businesses fast loans and instant access to cash for short-term needs. These lenders don’t usually have the same lending criteria as major banks, and this option can be useful for personal or business credit scores that aren’t very strong.
- Government Grants. Although harder to come by, having your business funded through a grant is one of the best ways to avoid costly repayment terms. There are a number of major companies, such as Goggle, that have grant programs, but the application criteria and the competition are tough.
- Crowdfunding. This a solid option for business-to-consumer companies, and relies on the public interest and private support for financing. There are several popular crowdfunding websites where you can take your business idea directly to the people.
When You Should Start Your Search
During startup is the most common time that small business owners look for funding, but there are other times when a cash flow boost is needed to keep things working smoothly. Small business owners know when they need more funding, but by planning ahead and recognizing early warning signs, you can avoid a scramble for funds at the last minute.
Funding applications and approval can take some time, so its best to be prepared. Some of the areas where you will need the cash flow include:
- Having to hire more staff
- Opening new business locations or branches
- Stocking up inventory products
- Buying new or more equipment
- Refinancing old debt accounts for better rates
- Seasonal sales boost needs
Regardless of why you need the money, you need to make sure you are only borrowing what you need and at terms that you can consistently meet. It is not a good idea to ask for as much money as you can get since you will be paying a fee (usually the interest rate) for whatever funds you get.
Only borrow the funds for the immediate need and not your long-term income plans. Your current business income may fluctuate, so a safe and affordable payment now is the way to address your funding.