Thousands of small businesses are started each year. While every business is unique, business owners have something in common - they all needed capital to launch their venture.
Once a company is up and running, it’s even more important to have low-cost funds to cover stability and growth initiatives. Outside financing helps shore up working capital, keep cash flow steady, hire, launch marketing initiatives, buy inventory and equipment and more.
It’s even more important during the current pandemic and economic downturn to rebuild and meet growth goals. There are no universally accepted “good” or “bad” financing available for funding. The best solution will depend on your needs.
Here are 8 of the most common ways to finance a business, along with some important information to keep in mind. You don’t need to be a financial expert to acquire funding, but it’s a good idea to check with your accountant or bookkeeper to determine the best rates, terms, and loan amount that will be most effective.
Here are the two main ways to finance a small business:
Debt
A loan or line of credit provides you a set amount of money that has to be repaid within an agreed upon period of time. Most debt loans are secured by assets, which means that the lender can take the assets away if you don’t pay.
A loan can also be unsecured, with no specific asset securing the loan.
Equity
Selling a part of your business, also known as selling an equity stake is another type of financing. The new owner of the equity gets all benefits, voting rights, and cash flow associated with the sale so you usually don’t have to pay back the investment.
Personal money can be used to cover startup costs or for working capital if you have an established business. There are options when it comes to funding a business with personal money. You can tap into savings accounts, equity in real estate, retirement accounts, vehicles, and other items you can barter for cash. Don’t forget to account for the money on your business books. This helps you track the amount your business owes you back.
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The Small Business Administration 7(a) Loan Program is known as the “gold standard” in small business funding. It’s the SBA’s primary program for helping small businesses with financing guaranteed for a variety of general business purposes. The SBA does not make loans itself, but rather guarantees loans made by participating lending institutions.
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A Bank Term loan from a bank in the SmartBiz network can provide the funds you need if you need faster funding than with an SBA Loan. With a term loan, you get funds in a lump sum that you pay back monthly.
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A business credit card lets you borrow money to make purchases. If you don't make payments in a certain time period, you'll have to pay interest on top of what you borrowed.
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Learn more about business credit cards: Benefits of a Business Credit Card.
Crowdfunding is where you get a lot of people to invest in your idea. Kickstarter is probably the most popular crowdfunding platform for those who want to raise money to launch a new product or service. Some sites will collect all the money as it comes in; others won’t collect it until the goal amount is reached.
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Angel investors are individuals or groups of individuals who invest money or equity financing in start-up or early-stage small businesses. Angel investors often invest amounts ranging from $25,000 to $50,000. Three of the most famous companies that got their starts with angel investing are Amazon.com, Starbucks, and Apple.
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A microloan is a small sum of money lent at low interest to a new business. Generally, microloans are for less than $50,000 and used for early expenses for small businesses and nonprofits.
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Factoring financing allows business owners to access a cash advance from outstanding invoices. In short, it’s selling your outstanding invoices to a third-party for about 80% of the total invoice value. Once your customer pays, the factor finance provider will collect the invoice value, deduct their fees, then forward the leftover amount to your business.
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For more details, review Factoring Receivables: Everything You Need to Know.
Do you have the cash flow to support a loan? That’s the most important question you need to ask yourself. Understanding loan details and payments can be confusing. Work with a lender who is available to answer any questions you have about rates, terms and payments.
SmartBiz Loans has a sliding calculator to help determine monthly payments for an SBA loan through our bank partners.
A financial plan is a section of your existing business plan that includes financial statements indicating where your company stands currently and where it expects to be in the near future. A financial plan helps you determine how much financing your business might need in the future. A financial plan also helps lenders determine if lending you money is a wise use of their funds and can indicate the net worth of your business at the end of a certain time period.
If you don’t have a financial plan, create one with our guide: How to Make a Financial Plan in 6 Steps.
This is key. You simply won’t get favorable rates and terms if you have low credit scores. The SmartBiz Small Business Blog has a wealth of resources to help you build and manage credit. Check out the following article for actionable ways to keep your scores high: Personal Credit Score vs. Business Credit Score.
Before you apply for a business loan or another option, it’s a good idea to speak with a financial professional. They can help you decide what type of funding is best for your unique business and the amount you need to reach your goals. If you need to improve your scores, more information can be found here: Ways That You Can Help Improve Business Credit Score.
Finding a way to finance a small business for rebuilding or growth can be challenging. It can be one of the most difficult things that most small business owners will ever do on their entrepreneurial journey. Do your homework and don’t be afraid to hire a financial expert to assist you. It will pay for itself in the long run. Here are guidelines to help you find the right fit: How to Hire an Accountant for Your Small Business.