No matter what industry you’re in, if you’re a business owner, there will probably come a time when you could use some extra capital to achieve your goals.
Where, when, and how to apply for funding is an issue that every business owner must think about carefully, whether they want to expand their operations to more locations, grow by acquiring another business, or take advantage of an exciting new opportunity that requires cash expenditures up front.
There’s a lot to consider. The small business funding landscape in the U.S. is undergoing a lot of changes. One reason for this is the recent explosion of new, data-driven fintech (financial technology) companies that serve small business owners in particular. To help you choose, let’s take a look at 3 of the top sources for small business funding.
1. SBA Loans
Small Business Administration loans, or SBA loans, are one of the most popular and well-known sources of funding for small business owners. These are probably what first comes to mind when you think about financing for your business.
SBA loans are funds loaned to you by a lender, usually a bank, and backed by the SBA. Lenders appreciate these loan programs because the SBA guarantees a portion of the loan amount, which lowers the risk for the lender. Because of that guarantee, these loans come with more flexible payment terms and better interest rates than many small business owners would otherwise be able to qualify for.
SBA loans are certainly a good option for many businesses, though there are some drawbacks to keep in mind before you apply. As you might imagine, given those attractive loan terms and rates, they’re highly competitive. The application process can be long and tedious, requiring you to submit lots of paperwork, tax returns, and other personal information. You’ll have to submit to a personal credit check as well.
2. Invoice Factoring
Invoice factoring is a financing method that allows business owners to access funds by selling their own outstanding invoices to a third party. Every factoring company works a little bit differently, and there are many of them, so it pays to do your research if you’re thinking of going down this route.
Invoice factoring is popular for companies that want to shift some of the burden of waiting for payments on to a third party, and get their money sooner. They do this by selling their outstanding invoices, usually in a big chunk of many invoices or several high-value invoices, to the factoring company, also known as a “factor.” The factor pays up front, then holds the invoices and collects payment from the customer.
This might sound like a fast and easy way to get more cash, but it comes with some downsides. For one thing, you’ll lose a percentage of your invoice value in fees to the factor. Fees vary, but expect to pay anywhere from 60-95% of the total invoice value in fees, plus other assorted fees like origination fees, monthly minimum volume fees, collection fees, and more.
As you can see, working with a factor could get expensive very quickly, so it’s a good idea to evaluate any agreements very carefully, and even enlist a lawyer or accounting professional to help you understand what you might be committing to pay.
3. Business Lines of Credit
A business line of credit can help you meet your business challenges, like late invoice payments or unexpected expenses, with grace. Many small business owners also rely on lines of credit to help them grow and expand.
So what is a business line of credit? It’s an amount of money, pre-determined by the lender, that you can borrow and use as you see fit, then repay it. Many lines of credit are revolving, which means that with each payment, the principal you repaid becomes available to use again, within your credit limit and in the timeframe outlined by your credit agreement, if you have one.
Lines of credit are similar to credit cards and different from bank loans in this regard, and many business owners love them for their flexibility. There’s no fixed monthly payment, and no need to reapply once you’ve been approved for a line of credit.
To apply for a line of credit from a bank, you would typically need to provide much of the same information as you would when applying for a credit card or loan. The lender will ask you to supply your personal and business details, and they may run a personal credit check to determine whether you’re eligible for credit. With many lenders, you’ll need to have been in business for a certain length of time—in some cases, years.
How Business Funding is Changing
Application requirements like those, along with long application and decision times, have been barriers for business owners in the past. Thankfully, that’s started to change.
In the last few years, alternative fintech lenders have begun offering new types of credit line products that cater to the needs of business owners. In some cases, fintech lenders are using data science (not FICO scores) to made credit decisions, removing the need for hard credit pulls, and making business funding more accessible.
When it comes to growing your business, securing the right type of financing is a huge piece of the puzzle. With extra working capital in the bank and solid cash flow forecasting tools to help you predict your financial needs in the future, you will be on your way to business growth and success.
About the Author
Irene Malatesta is a business content strategist for Fundbox, with over a decade of experience working with entrepreneurs and mission-driven businesses to bring their stories to life. Fundbox is dedicated to helping small businesses grow by democratizing access to credit.
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