Taking a business idea off the ground and turning it into reality can be an intimidating and complicated process with many moving parts.
Whether you're a business owner looking to start a small business venture or you're part of a flashy new startup with the next big idea, one big question remains: How will you plan to pay for it?
For most new business owners, the process of securing a loan will depend on a number of things and can require a considerable amount of thought and deliberation. Unfortunately, traditional banks are typically unwilling to extend loans to new or young business owners, as they see more risk than reward in doing so.
Instead, traditional bank loans are usually more freely handed out to business owners with nearly perfect credit or long-standing businesses with financially proven and/or successful track records. But where does that leave everyone else?
Luckily, there are multiple alternative lenders and loan options for business owners who may not have the required credit score, credit history or cash flow behind their business. However, before you start looking into your small business financing options, the best thing to do is determine exactly what kind of financing you're looking for, and how much you'll need.
Think about whether you'll need a short-term or long-term loan, how you plan to pay back the loans you decide to take on, and what exactly your business will need the money for. You should account for as many costs as you can anticipate, such as cost of equipment, assets, employing the workers to run your business operations, and more.
You should also become familiar with the details and stipulations of the small business loans and financing options you're researching, including their interest rates, how much money you can loan from each lender, and how the loans will meet your business needs. However, whether or not you are able to receive the loan will depend on your credit status and how much funding you'll require.
Let's walk through some of the most common alternative loan and financing options available to small businesses and business owners:
1) SBA loans: SBA loans are low-interest loans offered by the U.S. Small Business Administration's microlending program that aim to help small businesses grow their business. Business owners can borrow up to $5 million to purchase additional assets, buy equipment, hire staff, or other decisions that will help expand the organization. There are various types of SBA loans that have specific functions for different business aspects, such as purchasing land, purchasing equipment, or for natural disasters or crises.
2) Microloans: Microloans are loans from community-based nonprofits that exist to serve emerging entrepreneurs who may be at a disadvantage to kick starting their new idea or venture. Loan amounts will mostly range between $500-$50,000 and have interest rates between 8%-15%.
3) Merchant cash advance: A merchant cash advance puts cash into the hands of the borrower faster in exchange for a percentage of credit card sales during repayment. This type of loan can be a good option for businesses that need quick cash but also have large credit card sales volumes so that they can work towards a fast repayment.
4) Invoice financing: Invoice financing gives borrowers an advance on outstanding invoices from their customers. In return, the business will pay a fee to the invoice finance company. This type of financing can often incur high costs if long-term invoices are not in the picture.
5) Equipment financing: Equipment financing is best for businesses that need to purchase more physical assets in order to expand or grow their business. This can be anything from buildings and other real estate, vehicles, and any equipment your business needs to fully operate.
6) Lines of credit: A business line of credit is a loan that can provide small business owners with quick access to cash without stipulations of what it can be used for. While the loan is flexible in this way, it does require the borrower to meet certain criteria, such as annual income amount, years in business, or a minimum credit score.
Other alternatives include:
- Credit cards — Can be used as a short-term solution for financing smaller purchases that can be turned around and paid off in a short amount of time.
- Personal business loans — Can be secured by online lenders, depending on the situation. However, personal loans can also have very high APRs, with higher rates for individuals with worse credit.
- Online loans — Usually a quicker, more lenient way to secure the funding your business needs. Online lenders are more prone to consider external factors in addition to credit score or financial success when determining eligibility.
- Peer lending or family members — Mixing in friends and family into your business can be like playing a dangerous game, depending on the circumstance. If choosing to borrow money from friends, peers, or family members for your business, make sure to get everything in writing.
Now, we've laid out some financing options for small business owners, but how do you know which one to choose? When it comes to choosing a loan to help finance your business, you should consider these 5 things:
1) Read the fine print. Take a detailed look into each of the funding options you're considering and make sure that they align with your business plan. You don't want to borrow a loan that you cannot end up paying back — That would be detrimental to both your business and your personal finances.
2) Trust who you're borrowing from. It's no secret that many people have been scammed or misguided when searching for funding or capital for their business. Make sure that the financial institutions, banks, or alternative lenders that you're borrowing from are trustworthy and reputable.
3) Understand what makes you qualified. Each lending provider will have different criteria that they require their borrowers to meet. Ask yourself if you are qualified or eligible to borrow money for your business needs before you actually begin that process. Be confident in and honest about your credit score, the financial status of your business, and the amount of money you'll realistically need to take your small business to the next level.
4) Account for repayment. When borrowing money for your small business, it's important to think about the end result as well. What will you do if your business does not generate the revenue originally anticipated? What about if you can't make ends meet? What are the interest rates like and how long are repayment periods? In order to set your business up for the most success, you need to think about the whole process from beginning to end.
5) Get your documentation in order. In order for the cash to hit your hands, you'll need to first provide a lot of documentation. Documentation is necessary to confirm who you are, what your business does and why it needs the funding, and whether or not you're eligible to receive such loans. Organizing your documentation ahead of time will help speed the process along and smooth out any bumps in the road that you might come across. Remember, if you fail to prepare, you may be preparing to fail.
And there you have it. You have all the basic knowledge you need to start researching options for your small business to thrive! At Sorge CPA, we offer the best business consulting services that will help you develop financing options and improve your business profitability. Our expert team can offer our years of experience and professional advice to help you make the best financing decisions for your small business.
Give us a call to discuss your small business financing options today.