Running a business typically involves spending more money than you have in your bank account. Thus, it’s important to familiarize yourself with different financing options. Knowing how to secure funding for small businesses and larger enterprises is key to your success.
It’s also easier than ever before. Business owners now have access to a wide range of financing sources. The following are the major types you need to familiarize yourself with.
Bank & SBA Loans
This is one of the most common financing options business owners use. If you have a strong financial history and good credit, a bank or similar lending firm may be willing to loan you a lump sum, which you will pay back (with interest) over time.
Of course, lenders take on a certain degree of risk when providing business loans. One recent survey indicates major banks approve such loans less than 20% of the time.
That’s why you might also consider an SBA loan. To promote economic growth, the SBA will sometimes guarantee a certain portion of the loan to reduce the amount of risk a lender takes on. While qualifying for an SBA loan isn’t always easy, this option may still be worth pursuing.
Using a credit card to make business purchases is certainly a viable approach to financing. That said, there is always a certain degree of risk involved in using a credit card. Don’t be impulsive with your spending. You should only finance your business with a credit card if you know you can pay back what you owe.
Business Line of Credit
Traditional loans provide business owners with lump sums. A line of credit gives you regular access to a potentially larger amount of funds. You only pay interest on the amount you actually draw from your line of credit, making this a useful option for making large, unanticipated purchases.
Many business owners need to purchase pieces of equipment in order to operate. Sometimes a lending company will allow you to pay for a piece of equipment in installments (again, with interest) if you can demonstrate that the value it provides your business exceeds the cost.
However, it’s important to know that lenders often require business owners to put up other assets as collateral when offering equipment financing. Failing to make your payments could result in the seizure of your collateral.
Do you have any unpaid invoices? If so, you can turn them into fast cash by contacting an invoice factoring company. They’ll buy them at a discounted rate, and cover the balance (minus their fee) once they collect the remainder.
Merchant Cash Advance
A Merchant Cash Advance is ideal for businesses that regularly perform credit card transactions. A lender provides a lump sum, and you pay it off by allowing them to collect a certain portion of your daily credit card sales. Keep in mind, however, that interest rates for MCAs tend to be very high.
Online platforms such as Kickstarter have made it easier than ever to crowdfund your business. This helps you gauge customer interest if you’re not sure there’s a market for your services. Customers provide funding, with the promise of some form of reward later.
It’s important to conduct thorough research before choosing the right financing option for your goals. Each offers its own set of pros and cons. The basic information here will simply help you get started. When you find the ideal financing option, you’ll be better prepared for success.
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