Ways to finance your small business

The right type of small business financing can mean the difference between success and failure for many small enterprises. That may be especially true when a setback, such as a pandemic or recession, puts added pressure on capital that’s already stretched thin. New funding may help the business not only cope with the setback, but also emerge stronger and more profitable. With that in mind, the key question is:
what type of financing best fits your small company’s needs?

Here are nine options to consider:

Small business term loan

A small business term loan gives you a fixed rate and repayment term for the financing you need to grow and sustain your small business. This type of financing may be used to hire new talent, improve your cash flow, pay workers, open new locations, launch a marketing campaign, purchase materials, inventory, equipment, or technology, or take other actions to help your small business succeed.

A good term loan should give you quick access to cash, freedom from application, origination, and prepayment fees, improved terms as you repay, and the possibility of same-day approval and funding.

Pros

  • Simple and fast application process
  • High loan amounts received upfront
  • Qualifying is easier than bank loans

Cons

  • Greater frequency of repayments
  • Interest rates vary significantly
  • Potential fees from prepayments

Small business line of credit

A small business line of credit lets you access variable amounts when you need the funds rather than a lump sum all at once. Like a term loan, a line of credit can be used for a wide variety of business purposes.

A good line of credit should offer you flexible guidelines to qualify, an appropriate credit limit, credit that's replenished when you make a payment, a customer portal so you can draw funds as soon as you're approved, and the possibility of same-day approval if you quality.

Pros

  • Pay only for what you use
  • Pay back early and save on interest
  • Constant access to funds

Cons

  • Low credit limit amounts
  • Fees/APRs vary significantly
  • Higher interest rates than banks

Payment Protection Program loan

The PaycheckProtection Program (PPP) presents a unique opportunity for small businesses to obtain financing to pay salaries, wages, benefits, rent, utilities, and other expenses during the COVID-19 health crisis. PPP loans offer a fixed 1%rate, loan forgiveness for qualified expenses, deferred payments for the first six months, and a five-year repayment term for amounts excluded from forgiveness.The deadline to apply is August 8, 2020.

Pros

  • Forgivable, under certain requirements
  • Low interest rate of 1%
  • 5 years to pay back loan

Cons

  • Pay back loan if not spent properly
  • Subject to business audit
  • May take weeks to receive

Small Business
Administration(SBA) loan

The Small Business Administration (SBA) guarantees several types of small business loans that are funded by banks and other lenders. SBA loans may have easier guidelines than traditional bank loans, but the SBA’s guidelines are still generally quite strict. An SBA loan may require collateral. The application and approval process can take weeks. Funding tends to be slow.

However, once you get over all the application hurdles, SBA loans are some of the less costly small business financing options available. More favorable loans are available in case of a natural disasters like COVID-19, floods, fires, tornadoes, hurricanes and more. These are known as Economic Injury Disaster Loans or EIDL. This SBA Loan program is designed to get business back on their feet with up to $2 million dollars in financing and with terms as long as 30 years.

Pros

  • Low down payments
  • Reasonable interest rates
  • Long repayment terms

Cons

  • Extensive paperwork
  • Long approval time
  • Requires strong credit

Traditional bank loan

For most small businesses, a traditional bank loan may be attractive, but unobtainable. The application process can be time-consuming, and you’ll have to have excellent personal and business credit, and very strong financials to be approved. If you are, you may not receive your funds for a while.

The easiest way to secure business financing through traditional banks is to apply with banks with whom you already have a banking relationship. It is not set in stone, but familiarity at the time of
assessing risk on a business loan, will go a long way. More so, having that relationship will help if the difference in being approved or not for a loan is something small. Banks value longs standing relationships which in turn lowers the risk in the investments.

Pros

  • High loan amounts
  • Low interest rates
  • Helps build business credit

Cons

  • Requires strong credit
  • Extensive paperwork
  • May take months to receive

Merchant cash advance

This type of funding gives you a small percentage of your future credit-card receipts as a short-term cash advance. The lender then takes a percentage of your daily card receipts to repay your advance. Merchant cash advances are flexible and relative easy to get, but can come with high fees that reduce your working capital.

It is important that when assessing which small business financing
works best for your business, you know what the payment terms are
and how they affect your cash flow. Between the forgone revenue and the percentage of sales payments, you should calculate your final cost and compare it to taking a loan and that loan’s interest cost.

Pros

  • Fast access to funding
  • Low credit score approvals
  • No collateral required

Cons

  • Expensive due to high APR
  • Daily deductions affect cash flow
  • Does not help build business credit

Invoice factoring

Another creative way to finance your small business is to sell your
receivables at a hefty discount to a third-party for cash. You’ll be giving up a big chunk of money that in time you might have collected in full. You may have to commit to a long-term agreement. Factoring could damage your reputation or brand image when your customers realize you sold their accounts.

Pros

  • Fast and ongoing cash flow
  • Low credit score approvals
  • No collateral required

Cons

  • Fees as percentage of sales
  • Liable for unpaid invoices
  • Lack of control on invoices

Small business equipment financing

Small business equipment financing uses machinery, technology, or other physical assets you want to purchase for your business as collateral. With this type of financing, other credit criteria may be less material for you to qualify. The funds can only be used for the specified purpose, and if the loan isn’t repaid, the lender can confiscate your equipment.

Pros

  • Buy, repair or lease equipment
  • Spread costs on a defined term
  • Same equipment used as collateral

Cons

  • Funds restricted to equipment
  • Manufacturer receives funds direct
  • High interest rates

Loans from friends or family

Friends and family may be willing to help you finance your small
business, but this type of financing can become problematic. People who want to help may not be financially able to or they may feel that their investment entitles them to meddle in your business. If you can’t repay the loans, your funders may feel angry or cheated.

Pros

  • Low interest rates
  • Less paperwork
  • Flexible payment schedules

Cons

  • Lack of clarity on documentation
  • Tax implication for borrower and lender
  • Possible social awkwardness at gatherings

Talk to the experts at Idea Financial to find out how to get funding for a small business and get the funds you need fast.

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