Understanding the Various Financing Options of Small Businesses

blog illustration image

Businesses these days revolve around creating the perfect customer experience. Trends and preferences change with the blink of an eye, and businesses that can’t keep up are cut out of the race. A study shows that only 80% of the businesses cross their first-year mark and around 45% to 51% of the business survive for more than five years. One of the main reasons for this may be the lack of financing for immediate business requirements.
Recently, there has been an evolution in financing structure and procedure to facilitate easy and quick loans for businesses. Today, financing for small businesses can be classified into two types – traditional financing and alternative financing.
Traditional funding is given by established institutions. A few examples of the traditional financing options available are below.
1) Bank Loans:
Most banks offer term loans, a business line of credit or equipment loans. Term loans are preferred if you need money to fulfill your immediate business needs. A lump sum amount of money is given to be repaid in a fixed time period. The bank interest rate for the amount borrowed is added to the repayable amount. With a business line of credit, you can borrow money from the bank when you want per your business requirement. The interest rate will apply only for the money you have borrowed. Equipment loans are lesser-known bank loans that can cover between 80 to 100% of your business equipment costs This type of loan is useful in most business industries especially construction and auto repair.
Bank loans are one of the hardest loans to qualify for because the average APR for bank loans is 2.24% to 4.47% . The lower the interest rate, the tougher it is to get.
2) Government Grants
Bank loans and their strict lending requirements give rise to other kinds of traditional financing options. Banks and other lending institutions will provide the loan when it’s guaranteed by the government to small businesses. Government grants are not applicable for starting a business, paying off debt or for operational expenses. To learn whether a grant applies to your small busines,  visit grants.gov.
3) Investment Capitals
The Small Business Administration has an Small Business Investment Capital(SBIC) program that is powered by private equity fund managers who pool capital for small businesses. This loan is guaranteed by the government and is a win:win for both the investor and the small business owner.
Alternative financing is not cash, stocks or bonds. It is immediate capital that is provided to the business to streamline their existing processes or launch new ones. The prerequisites for acquiring these  types of funding is also comparatively lenient to their traditional counterparts and varies by type.
4) Crowdfunding
The accumulation of money from various investors for a single cause or business is called crowdfunding. There are many crowdfunding platforms where you can enroll and get huge financing from multiple investors. The best part of crowdfunding is that you do not have to depend on a single person or entity to provide you with a large sum of money.
5) Invoice Factoring
In this method, the lender takes responsibility for your invoices and directly collects the money from the concerned people/business. Invoice factoring or accounts receivable factoring allows you to bring cash inflow to your business and not sit around waiting for customers to settle their invoice amounts.
6) Short Term Loans
Short term loans are one of the most common types of alternative funding where you can borrow an amount of up to $200,000 depending on your business requirements. You can repay this amount within the next 3 to 18 months but, the APR (Annual Percentage Rate) is usually higher than the traditional financing sources.
Short term loans do not need a high credit score, a business plan or even three months bank statement and the amount requested will be approved almost immediately. It’s important that you have a plan for repayment of all types of loans, especially this one since the payment terms are for a shorter amount of time and have a higher interest rate.
7) Small Business Administration (SBA) Loans
SBA loans are government aided financing options where you can get loans for your small business with interest rates like bank loans. This loan does not fund businesses directly but allows lenders to pool in money and finance your business. As this is a government-led scheme, the SBA (small business administration) covers the losses of lenders in case of failed businesses.
Running a business can be an arduous task. With all the different types of financing options presented to you, it’s up to you to choose the best ones that fit your business model and requirements.
If you are struggling with getting the funding you need because your credit isn’t up to par, reach out to an NFCC small business coach today!

About the author: Joseph Brady is Vice President of Digital Marketing for Reliant Funding, a provider of short-term working capital to small and mid-sized businesses nationwide. He has more than 14 years of experience in B2B digital marketing, optimization, and operations, with a focus in the financial services market.