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Business Funding Options

Running a business has its challenges, and one of the main concerns of keeping a business afloat is funding. At some point, you will most likely need to invest in your business in order for it to grow.

Whether you are a small business that is just starting up, or an established business with a large operation, business funding can help with nearly any purpose:

  • Starting a business
  • Business expansion
  • Purchasing real estate
  • Purchasing equipment
  • Purchasing inventory
  • Covering any gaps in cash flow
  • Covering unpaid invoices
  • Increasing working capital
  • Hiring new employees
  • Opening a new location
  • Paying taxes
  • Refinancing another loan
  • Buying insurance
  • Covering emergency costs
  • Advertising
  • Building your business credit history

Types Of Business Financing

There are many types of business financing but we will focus on the main types:

  • Working capital loans: A working capital loan helps finance everyday operations by providing working capital for a company's short-term needs.
  • Business line of credit: A business line of credit allows businesses to borrow funds up to a certain limit (such as $100,000) and only pay interest on the borrowed amount. These are generally short-term lines of credit but can be renewed. This type of funding can be found at banks or online lenders.
  • Invoice factoring: Invoice factoring allows a business to sell its accounts receivable to a third party (which is called a factor) at a discount. This type of financing allows an advance on payments for outstanding invoices.
  • Term loan: Term loans are generally taken out from a bank and borrowed for a specific period of time with either a fixed or variable interest rate. These loans are best for established small businesses with stable finances.
  • SBA loan:  The Small Business Administration (or SBA) guarantees loans offered through banks and other types of financial institutions. Term loans and qualifications depend on the type of SBA program, the most popular of which is the SBA 7(a) program.
  • Funding marketplace: A business loan marketplace can connect you with multiple lenders after filling out one simple online application. One of the main perks of this is that it reduces the amount of time businesses have to take to find a loan that best fits their needs. Most marketplaces are free for borrowers, although some charge a small service fee.

The type of financing you choose for your business can vary based on your needs. Some other commonly used types of loans you may consider include:

  • Crowdfunded loan: Business can raise funds through an online platform with the help of consumers. Businesses generally offer their backers a small reward or early version of their product.   Debt crowdfunding allows lenders (such as individuals or institutional investors ) to lend the funds to businesses in need and eventually earn interest once the debt is repaid.   Equity crowdfunding is a method in which individuals can invest in a business for future returns.
  • Business credit card: Business credit card applications are evaluated based on the owner's personal credit score and all income sources and is issued under the business's name. A business credit card requires a personal guarantee and can help build business credit. Most business credit cards don't impact the owner's credit score unless it is not repaid.
  • Equipment financing: Equipment financing is secured by collateral such as equipment and includes leasing arrangements. It can also be used to acquire more assets.
  • Merchant cash advance: A business or merchant cash advance is a short-term loan based on the business's expected cash flow or credit card receipt. Payments are usually taken daily or weekly through a percentage of future credit card sales or revenue.
  • Microloan: A microloan is a small loan of $50,000 or less, and can be offered through Community Development Financial Institutions (CDFIs) or an SBA loan program.
  • Invoice Financing/Factoring: These funds are advanced against unpaid invoices or receivables. A portion of the funds are advanced upfront and the rest of the funds (minus fees) are distributed once the invoice is paid.   Financing may also be extended based on the business's expected receivables, which also requires the business to make payments.
  • Vendor Terms: Vendors allow businesses to purchase necessary goods or services and pay them back in 10 - 180 days.

Other popular types of financing include:

  • Long-term business expansion loan
  • Real estate crowdfunding
  • Business acquisition loan
  • Franchise loan
  • Commercial Real Estate Loan
  • Hard Money Loan
  • Emergency Business Loan
  • Installment loan
  • Small business grant
  • Startup loan

Before You Take Out A Business Loan...

Consider some key factors, such as:

  • How much you need. What is the minimum amount you need to accomplish your business goals? Can you repay it? Contacting your accountant or a financial advisor can help you decide what to do next.
  • How quickly you need funding. Depending on how urgently you need financing, you can obtain funding in a few hours, days, or even weeks. Online lending options are generally quicker at business financing while lending types like traditional bank loans can take around a month to be approved.
  • When you can pay it back. Short term loans are usually less than 24 months, medium terms are around 2 to 5 years, and long term loans are generally over 5 years.   Short term loans usually carry higher interest rates but long term loans generally cost more in the long run due to its repayment period.   Be sure to calculate how much the loan will cost you and whether or not you can repay it successfully.
  • Where your finances stand. The amount you can borrow is based on your  creditworthiness and finances. This could include your personal credit score, business credit score, and/or any information that appears on your credit report. Negative information like past or open bankruptcies and business tax liens can make it more difficult to find financing.
  • How much your business makes. Your lenders will most likely want to know your annual revenue, and many will look into your monthly revenue, cash flow, and debt-to-income ratio.   Pro tip: Keep a business bank account to make it easier to gather your financial information for your lenders.
  • How long you have been in business. The truth is a younger business is more likely to have a higher risk and lenders are less likely to extend financing unless your company has been in business for a specific number of years.
  • Whether or not you need collateral. Some types of loans require some form of collateral, such as equipment or real estate.
  • Whether or not you can sign a personal guarantee. Most lenders prefer a personal guarantee, which makes you liable for the loan debt if you don't repay it.
  • Your industry. Some lenders may place restrictions on the types of businesses they will fund.   The government uses Standard Industrial Classification (SIC) codes and North American Industry Classification System (NAICS) to categorize businesses by their industry.   SIC and NAICS codes appear on business credit reports and are used by lenders to determine which types of businesses they will lend to.
  • What you need before you apply. Create a financial checklist before you submit an application to make the process easier by collecting the following information:   * Personal credit scores and reports   * Most recent personal tax return   * A valid government-issued ID   * Personal address verification   * Business credit scores and reports   * Most recent business tax returns   * Recent business bank account statements (at least 6 months)   * Verification of business address and lease agreement (if applicable)   * A statement regarding your business plan and future projections   * Proof of ownership such as a business license or articles of incorporation   * Trade references   * Voided check for ACH payment or direct deposit   * Franchise agreement or UFOC   * Affiliate business financial information

How To Pick The Best Business Funding

Not sure how to choose the right business funding option for you? Consider the following tips to help you narrow down your search:

  • Evaluate your situation: Pinpoint everything you need to know before getting a loan and where you stand when it comes to your personal and business finances, credit, and debt-to-equity ratio. Lenders will view you more favorably if you have a higher credit score and lower debt-to-equity, which will help you qualify for lower interest rates and save thousands over the life of the loan.   The type of loan you take out depends on its purpose so be sure to consider all types of business financing. (Example: If you are looking for steady cash flow, a line of credit might be your best option; or if you are looking to purchase inventory, you may look into an equipment financing loan.)
  • Know how much you need to borrow: Do you need several thousand or millions for your business? Make sure that you take out as much as you need -- no more, no less. After all, you have to repay the borrowed amount in full and any interest accrued.
  • Compare your interest rates: Consider how your interest rates will impact the amount that you borrow and how much you will pay over time.
  • Compare your repayment terms: Think about your payment schedule. Will you be able to pay it off early and save thousands of dollars or will you accrue interest over a longer period of time?
  • Consider the fees: Loans can come with many fees that include application fees, origination fees, late fees, and repayment fees. If the fees outweigh the interest rates, continue looking for other options.
  • Weigh all of your options before making a decision: Even if you are faced with an emergency expense, take your time and compare all of your options before ultimately taking out a loan. The health of your business is on the line and choosing the wrong loan can be disastrous.
  • Submit your application: Once you decide on a lender (whether on your own or through a lending network), you simply have to submit a loan application and any necessary documents (such as bank statements and tax returns). If the application successfully goes through, then you can use your funds as intended; if you are denied, you can try to apply with a different lender or apply for a different type of loan.

Advantages Of Business Funding

  • Business owners can find business financing for specialized needs.
  • Business loans made specifically for business owners or the type of business (for example: business loans for women).
  • Business financing allows you to choose what type of loan to take out and how you use your funds.
  • Business loans generally have lower interest rates when compared to other types of financing.
  • Interest payments on a business loan can be used as a tax-deductible.
  • Using your loan correctly and paying it off on time can help you build your creditworthiness.
  • Business loans are fairly easy to find. Whether online or at your local bank or credit union, there are many lenders who can cater to your needs.
  • Business owners can borrow a large amount of funding -- sometimes up to $1 million.

Disadvantages Of Business Financing

  • Qualifying for business financing depends on your credit rating and business finances, meaning that you may be denied for a loan if you don't meet the necessary requirements.
  • Interest rates not only depend on your creditworthiness but also the market, potentially resulting in fluctuations in your APR.
  • Many lenders require that you provide collateral (personal or business assets) in order to ensure that they will be paid back if you aren't able to pay back the funds. 

Frequently Asked Questions

How does business financing work?

Business financing solutions allow your company to get the funds needed to expand and cover any expenses. These loans are repaid over a set period of time with interest added.

What types of financing are available for a small business?

  • Business lines of credit
  • Equipment loans
  • Invoice factoring
  • Invoice financing
  • Merchant cash advances
  • Personal loans
  • SBA loans

Can I get a business loan with bad credit?

Yes, however you may have to work with a lender who specializes in bad credit business loans.