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When you need financing, you don’t necessarily have to walk into the local bank branch and speak to someone in person. There’s a long list of alternative options, including some that allow you to find and get approved for financing from home in your pajamas. Here’s a look at some of the ways to get cash for your business if you’re interested in business financing.
What is Business Financing?
Business financing is a catch-all term for loans given to businesses. In some cases, it’s expanded to include other types of outside investments. However you approach the topic, business financing is used to bring cash into a business for any number of reasons.
Small to midsize business (SMB) owners and managers don’t need an MBA to navigate the process confidently. When deciding on business financing, consider these core criteria:
- Interest costs: Interest is the main way to pay for a loan. However, there are better ways to compare the cost of a loan than simple interest rates. The annual percentage rate (APR) is an all-in cost, including interest and fees.
- Fixed costs: You may run into application and origination fees when applying for a new loan. Pay close attention to what you’ll pay for financing, and consider fees when comparing lending options. Origination fees are not included in a loan’s interest rate but are included in the APR.
- Payback terms: Loans may require a fixed monthly payment, adjusting payments, and other terms. Shorter payback periods generally lead to lower costs and higher monthly payments, while longer terms offer lower payments with a higher all-in expense.
- Funds flexibility: Do you have to draw on the loan right away, or can you wait to take out funds when needed later? Are there any limits to how you can use the proceeds? Double-check the fine print to ensure you pick a loan that aligns with your business needs.
- Customer experience: Last but certainly not least, customer service and online platforms make a big difference. When you want to look up loan details or interact with your lender, it shouldn’t be a painful experience.
Debt vs. Equity Financing
Debt financing is a term for lending where you’ll have to pay a loan back at some point. Any business loan, including credit cards, can be considered debt financing.
Equity financing is raising funds from investors who get a stake in the company. Instead of interest, equity investors look to earn a return on their investment through either dividends (cash payments) or an increase in the company’s value. Under this model, the owner is accountable to investors, who are, in some ways, the owner’s boss in the business.
9 Ways to Finance a Business
If you’re ready to move forward and raise funds for your business, consider these nine popular methods to finance a business.
SBA loans are business loans backed by the United States government. The Small Business Administration (SBA) partners with local banks and other lenders to manage these loans. Businesses apply through their chosen lender and must adhere to strict criteria for approval.
Once approved, SBA loans work like any other loan. However, the government may cover some of the losses if the business goes under or stops paying the loan as agreed. This makes lenders more willing to lend to new and small businesses, as there’s a lower risk of losses for the bank. That could make it easier for some businesses to get approved.
Traditional Bank Loan
With a traditional bank loan, your business borrows funds with a promise to repay on a fixed schedule. Bank loans may be secured by assets, which can help you qualify for a lower interest rate. In any case, it’s up to the bank or credit union’s underwriting team to decide if you’re approved.
Local banks offer the benefit of in-person relationships and customer service, but they also tend to have limited loan choices. Expanding your search to national banks and online lending may bring you better options with lower costs.
Online and Peer-to-Peer Lending Platforms
Banks are just one of the lenders that offer online loans. Many companies work specifically to bring businesses financing through apps and web portals. Because they’re serving a broad, national customer base, they may offer more flexible terms, conditions, and favorable rates. However, you may have to shop around to find the best loan for your goals.
Some lending platforms offer loans from their own funds, while others rely on peer-to-peer lending, where many lenders put their cash together to fund your loan. There’s no better or worse funding source in this aspect.
Square small business loans are available from $300 to $250,000 for businesses that process payments with Square. Learn more about Square small business loans here.
Business Credit Cards
Business credit cards are extremely popular for short-term business financing. While many business owners don’t think of credit cards as a loan, they’re actually a commonly used loan. You can borrow interest-free for up to a month. You’ll have to pay off the card balance in full every month to avoid interest payments. If you do that, credit cards give you several potential benefits.
Business credit cards may offer travel or cash back rewards, protect you from fraudulent charges, and may come with additional purchase protection and travel insurance benefits.
Invoice lending, sometimes called invoice factoring, allows businesses to borrow using outstanding invoices as collateral. It’s like a payday loan for a business, but usually with much more favorable terms than consumers see in the payday lending industry.
If you show that your business invoice can reasonably expect to be paid, it’s an asset on your balance sheet under accounts receivable (A/R). In exchange for earlier access to cash, you must pay back the loan under specific terms, including fees to the lender.
If you run a product business, you can get your business’s raw materials, supplies, and other goods on credit. That doesn’t mean using a credit card. With vendor financing, vendors or supplies offer products with no up-front cash requirements.
Vendors benefit from more sales and are often open to advancing goods at 0% interest, but some charge extra for financing while others offer discounts for early payments.
Crowdfunding platforms bring your business financing to the public. Like peer-to-peer lending platforms, crowdfunding requires posting a public application that you’re trying to bring in funds. But instead of a promise to pay back, you promise to deliver specific products or services, usually with something special, in exchange for supporting your business.
While it’s nice to bring in a lot of cash with the ability to deliver later, poorly run crowdfunding projects can be a nightmare. If you don’t hit your fundraising goal, you may not get the funds at all. And if you don’t live up to promises, it could sink your business reputation.
Line of Credit
A business line of credit is a revolving credit vehicle, somewhat similar to a credit card. With a line of credit, you can borrow and pay the loan back many times over. However, the repayment rules work a bit differently than a credit card, and there’s a good chance you’ll have to pay origination or annual fees to keep the line open, even if you don’t use it.
A major benefit of credit lines is that you are not locking yourself into a position where you have to borrow and pay interest. But you can rest assured that the funds are available to you when, or if, you need them.
Equity financing is the process of selling shares of stock in your business to investors. Just as large companies raise funds from investors with an initial public offering (IPO), you can run a private offering where investors pay for a slice of ownership.
Depending on your business and network, you may know enough people to raise an equity financing seed round from friends, family, and local angel investors. Growing businesses may need to upgrade to larger venture capital firms and startup incubators for larger cash infusions. But when you do this, you’re taking on partners and bosses who also have a stake in what you’ve worked hard to build.
Is Financing Right for Your Business?
Of course, businesses don’t need to seek outside financing. Many savvy business owners ‘bootstrap’ their companies — a term for self-funding all business needs and growth. If you can pull this off and reinvest your business income into the company, you can operate with the lowest costs while keeping 100% of your business shares.
If you decide business financing is the right choice for your business, picking the right type of financing and the best financing partner can help you move forward confidently. Taking the time to shop around and compare the details of your business financing options can lead you to the best long-term result.