Types of Business Financing
Types of Business Financing
Business financing is, in short, is a way for a business owner to start, run, and grow their company through funding. The right type of business financing for you is out there in one of these numerous options - it all depends on your needs, qualifications, as well as the other end: the loan rates and terms to meet you halfway.
Short Term Loan
Some business owners opt to receive funding via a short-term loan. These loans are straightforward. You receive a lump sum of cash to put into your business and make payments back to your lender until the loan is paid off.
Large and small business can qualify for a short-term loan. The requirements for this type of loan aren’t as stringent as others, but they’re expensive, which is perhaps the one downside to this simplified loan. Lenders feel they must protect themselves, and so the rates are higher for this type of business financing loan. You can even receive a short-term loan if you have bad credit, although the rates will be even higher.
Small Business Loans
Small business loans are derived from the Small Business Administration (SBA). The SBA isn’t a lender, but an extension of our government that assists small business in getting a leg up when in comes to acquiring business financing, like bigger loans. The goal for the SBA is to have actual lenders help fund these loans to encourage the existence, growth, and prosperity of small business in our country. Lenders actually don’t end up taking that much of a risk with these loans thanks to the SBA.
SBA loans will rely heavily on your credit score and thorough documentation, but the SBA is generous with these loans as even very small businesses are able to qualify. Your financial habits and personal credit history will play into your ability to qualify for an SBA loan.
Business financing can be in terms of investors, too. A venture capital firm is a group of investors interested in exchanging capital for equity in a growing business. The venture capital is usually distributed to the business in rounds, with businesses like startups receiving capital funds through Series A, B, and C rounds.
Venture capital firms go after tech-based disruptors with fast-paced businesses and even faster-paced plans, but this equity-based business financing can be helpful in growing a business that has just begun.
Business Line of Credit
You’ve heard of loans, but have you heard of a line of credit as an option for your business financing? Similar to credit cards, a business is given access to funds that can be drawn on whenever they’re in need (for capital, inventory, or whatever the business deems necessary to fund). You’ll only pay interest on the money you take out and use. Once you repay the amount you’ve borrowed on your line of credit to your lender, the credit is set back to its original amount.
The qualifications for a revolving line of credit for business financing are quite similar to loans. The lender will examine your credit score, credit history, and the financial standing of your business to determine if you’ll be a reliable borrower.
Business Credit Card
Yes, you can use a credit card to finance your business. Just like any other credit card, all you’ll need for this business financing option is a good credit score. However, you can still nab a decent business credit card even if you’ve got a credit score as low as 580, with some rewards and an unsecured line of credit (but watch out for the fees and interest should you miss payments on these cards).
You could use a business credit card to finance your entire business, but whether or not that’s the best method of business financing is still debatable. The rewards and miles that come with using a credit card regularly are enticing, and as long as you make timely payments, you just might make it out with more than you bargained for.
Traditional Term Loan
More established businesses might seek out a traditional term loan, sometimes called a medium-term loan. This type of business financing loan is larger in its amount but slower to fund. However, in exchange, the term lengths are longer and the interest rates are lower, especially in comparison to short-term loans.
These loans are designed for small business that already have experience, annual revenue, and a good credit score. They’re trusted, and lenders appreciate that, and so the reward comes with lower rates and longer terms. You can qualify through a local bank, but only about 20% of small business owners can qualify for a bank loan.
Accounts Receivable Financing
Accounts receivable financing, also called invoice financing, is a type of business financing that uses your outstanding invoices as collateral for a loan. With accounting software being so advanced and integrated in day-to-day business dealings, accounts receivable financing is easy to implement in any business - large or small.
In order to acquire invoice financing, your business will have to be a B2B company that provides invoices to your customers and you’ll need a track record that proves your customers typically pay. Otherwise, the collateral is null, and the lenders will have nothing to seize if your customers usually bag on their payments.
Asset-based loans, or equipment financing, are strikingly different than term loans and lines of credit. The main difference is that the piece of equipment acts as collateral in case you default on your payments.
Asset-based loans are helpful for business owners who don’t have an impressive credit history to rely on when seeking business financing. Lenders will look to the value of the piece of equipment rather than your credit score, bank statements and tax returns because that’s what they’ll be acquiring should you miss any payments. It’s much easier for a lender to seize this collateral and liquidate it in order for them to recoup their losses on this particular loan.
Merchant Cash Advances
This type of business financing is fast, but it comes at a price. Merchant cash advances are one of the more expensive options for businesses. Their cost is because they’re easy to access and they’re even quicker to obtain.
If you have bad credit or no collateral, you can still typically lock down a merchant cash advance. However, it makes sense that a lender would want to be protected and force the borrower to pay an extremely pricey premium. Also, these lenders know that if you’re going for an expensive merchant cash advance. Then it’s probably because it’s you’re only option. Basically, lenders will do anything to take advantage of that.
There are so many ways to finance a business, but in truth, the type of financing will come down to what your business truly needs and how your personal credit history will get you there. Good financial habits will follow you through your entire life, both personal and professional. Beginning to practice them now will undoubtedly help your business in the long run.