From renting office space to purchasing equipment and hiring employees, every business dream requires money to get your idea off the ground and running. Finding the right funding for your business begins by understanding what is available to you. At different times and circumstances, the best option may vary and is based largely on your current financial situation. Here are a few of the best options for small business owners.
Traditional Term Loan
Best for established businesses with strong credit scores. Terms are typically longer than two years with a consistent monthly payment. Term loans are great for financing business expansions, working capital needs or restructuring debt.
Best for established and profitable businesses. The Small Business Administration (SBA) helps business owners with long-term, low-cost loans. The SBA is a federal agency dedicated to helping entrepreneurs have access to affordable small business funding. The SBA doesn’t directly lend money but instead works through approved vendors such as banks, credit unions, and other lending subsidiaries. Lastly, the SBA guarantees a portion of the loan thereby incentivizing lenders to approve the loan at a lower risk. However, an SBA loan typically requires a down payment.
Business Line of Credit
Best for established businesses that need flexible working capital. This type of funding is very flexible and versatile and works similar to a home equity line of credit. You can draw upon it anytime you need such as in seasonal dips or unpredictable spikes. You pay interest only on the amount you use. A business line of credit can also be useful for unexpected emergencies. Because this type of loan is revolving, it can be more difficult to qualify for.
Business Credit Card
Best for new businesses that are looking to build a credit history. If you don’t need a large amount of capital or cash, a business credit card may be a good option. They work just like a personal credit card, but typically have higher spending limits, lower interest rates, and better introductory offers.
Best for established businesses with a poor credit history or immediate need. If you need quick funding or aren’t able to qualify for lower-cost options, short-term loans may be a good choice. The quicker you need funding, the more you will usually have to pay. Like a traditional loan, you will receive a lump-sum payment. Short-term loans typically have a higher interest rate, a term length less than a year and a larger monthly payment. This is one of the most accessible types of loans.
Best for business to consumer (B2C) startups. Crowdfunding platforms enable you to receive large amounts of money from small contributions made by many individuals. By sharing your vision, setting a goal and using social media and marketing campaigns you can encourage potential donors to support you. However, most crowdfunding platforms work on an “all or nothing” basis. As such, it works better for individuals seeking a modest amount of funding who can reach their goal. By incentivizing donors, you may receive more contributions.
Best for mission-oriented startups. Many programs offer funding for small businesses through grants. If you are willing to put in the time, grants are beneficial in that you don’t have to repay them back. While they are extremely competitive, there are many options out there.
Funding can be very beneficial when starting or expanding your business. Funding can be used for hiring employees, purchasing more inventory, expanding your location, financing equipment or obtaining working capital for rent, payroll, etc. Seek only enough funding to cover your needs. Financing is never free; whether it is through investors who seek a return or through lenders who charge interest. In order to know how much funding you may need, work with an accountant or financial professional who can help you predict when you will need funding and how much.
We at Peak Business Valuation work with a variety of businesses to help identify ways to increase their value and grow their business. We would love to consult you on funding your dream business and welcome any questions you may have. Feel free to reach out by email or through a phone call.