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Many small business owners rely on business funding to start, run, and grow their businesses. Yet, many small business owners don’t know which funding option best suits their needs. We’re here to help and answer your top questions when it comes to choosing the right business funding.
SBA loans don’t originate with the U.S. Small Business Administration; instead, the SBA backs the loans to encourage lenders to provide financing to small companies.
The two main SBA programs are for 7(A) and 504 loans. 7(A) loans can finance various types of projects while 504 loans are intended for sizable purchases of fixed assets like equipment.
Express Loans and Small Loans are special categories within the 7(A) program that have lower capital limits but faster turnaround. A separate SBA Microloan program offers up to $50,000 for earlier-stage companies.
Interest rates are determined by the lender but have a cap required by SBA. A proven business track record is needed for an SBA loan, but guarantees from SBA encourage lending to companies that may have been denied other types of financing.
Merchant cash advances provide a quick cash infusion that is repaid with a percentage of daily sales made by credit and debit cards. When sales are higher, a larger portion of the cash advance is paid back.
Merchant cash advances have a high approval rate and quick turnaround time but carry a heavy cost in terms of fees or APRs. They are primarily used when speed and convenience are priorities and when other funding options are not available.
Having a business credit card is a great way to give your company the financial boost it needs to cover day-to-day expenses when cash is short. The benefits of a business credit card include the ease of managing cash flow, earning rewards, and establishing a business credit score for future small business loans. Since information on business credit cards can be vast and inundating, this guide streamlines the how-to process of applying for a business credit card and the benefits it will bring you and your business.
A business line of credit allows a company to borrow cash as needed up to a maximum amount. This buffer can resolve cash flow shortfalls, which is especially useful in emergencies or when navigating temporary or seasonal fluctuations.
A major benefit of a business line of credit is its flexibility, especially because interest is only accrued on the amount that is withdrawn.
The terms, including the credit maximum, interest rates, and repayment schedule, are negotiated with the lender and are more favorable for companies with good credit scores. Credit risk also affects the required collateral and documentation for the line of credit.
Similar to a personal card, a business credit card gives immediate access to funds for purchases. This can overcome short-term cash flow problems that might otherwise restrict purchases critical to fulfilling customer orders.
Online or app-based tools to track spending that come with business credit cards are useful for effective budgeting and improving cash flow. Many cards also have perks like rewards points.
Although these cards provide flexibility, their interest rates can be high. It’s important to manage cards carefully to limit costly late fees and interest charges.
Microloans provide limited capital, typically up to $50,000, for initial costs or working capital. Microloans can come from traditional banks, online banks, and non-government organizations focused on community development.
Less strict eligibility requirements make microloans appealing to startups and early-stage companies, but these loans may fall short of the funding needs for many businesses.
Did you know that more than half of small businesses that seek new business funding experience a financing shortfall, meaning they obtain less funding than they seek? Learn how to maximize your success by understanding the key factors that determine the outcome of a business loan application, so you can maximize your success.
Equipment loans provide financing for machinery, vehicles, computers, or other fixed assets. A longer repayment schedule allows companies to invest in growth without an oversized up-front investment.
The equipment serves as collateral, reducing the need to secure the loan. Specific terms are negotiated with the lender and depend on the equipment being purchased and the company’s creditworthiness.
Invoice financing offers a cash advance based on outstanding invoices, creating short-term liquidity to cover expenses until customers meet their payment obligations. This type of loan usually comes with a weekly fee paid to the lender.
Another version is invoice factoring, in which the cash advance is equal to a percentage of the pending invoices. When the invoices are paid, the business receives the total minus the lender’s charges.
The fees for invoice financing can be substantial, and the business takes on added risk if customers delay or default on payments.
A cash flow loan extends capital based on the lender’s estimation of a company’s projected revenue. For businesses, it can mean rapid access to funds, but getting this type of loan requires strong evidence of sales performance. In addition, high interest rates can make cash flow loans costly.
With parallels to a home mortgage, a commercial real estate loan is used to finance properties like offices, factories, or storefronts.
The term and interest rate depend on the property and the company’s financials. The real estate itself is the primary securitization for the loan. As with home loans, refinancing is an option, and businesses can often use the equity in the property to obtain credit.
Alternative funding, simply put, is any type of funding you obtain for your business outside of traditional loans from banks. Some business owners may consider alternative funding options to finance their business if they’ve been turned down for loans in the past, have yet to build their business credit, have poor credit, or are unsure of how much funding they really need for their business. Some alternative funding options include:
As a small business owner, you may be eligible for a grant - financial assistance awarded by your federal, state, or local government.Tillful COVID-19 funding relief tracker
Angel investors are wealthy individuals (or groups of wealthy individuals) who invest their own money into companies. Venture capital firms invest other people’s money (which they hold in a fund) into companies. You don’t have to be a typical tech company to consider this alternative source of funding.
This alternative form of funding is particularly beneficial for business owners with an established business looking to expand. You don’t have to be a typical technology or medical startup to consider this route of financing. Depending on where your business is located, there are often regional or community-driven pitch contests that occur from time-to-time.
Chances are you may have found yourself doing some form of bootstrapping in the early stages of your business as a small business owner. There is no shame in bootstrapping! It often encourages lean operations and can help prevent you from over-leveraging and taking on financing beyond your capacity. No matter which funding option you choose, be it traditional or non-traditional, it’s important to have a solid business plan to back up your business and work on building a good business credit score to better your chances of obtaining when and as needed.Learn more on how you can Improve Your Business Credit Score here.
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