Financing options for small businesses
Small businesses have unique needs, often stemming from liquidity issues. They need the money to start a new project, but they haven’t been paid for the last project. They can’t just switch off until their money comes through, so what can they do? There are many financing solutions such as eCapital financing for small businesses that can help with short-term and long-term financial problems. Here are other commonly used solutions that you should consider.
The most obvious financing option for small businesses is a bank loan. Typically, many small businesses start out this way because they often don’t have the capital to take their business to a place where they can start making money. But loans can also be a good option for short- and long-term cash flow concerns, as long as you have the credit and collateral to absorb the loan.
A traditional loan will often give you relatively low interest rates and reasonable payment terms, but it can be difficult to qualify, especially after the recent recession when financial institutions tightened their requirements.
Small business loans are a type of bank loan specifically designed for businesses of a certain size. They’re easier to qualify than traditional loans, but they require a lot of paperwork and can take a long time to go through. They are backed by the federal government, so banks are more willing to lend to companies with lower credit ratings than traditional lending, but you still have to meet certain requirements to get that money.
Online lending is growing in popularity among small businesses, especially those with small or small amounts of credit. They also have a simplified application process, which can be appealing to busy owners who don’t have time to sit down with a banker and fill out reams of paperwork. Applications can often be approved and the loan funded within 24 hours, but their interest rates are usually higher than traditional loans or small business loans, especially if you have bad credit.
Loans can be a good place to start when looking for financing, but there are other options that may make more sense.
Invoice factoring is a process where you sell your outstanding invoices to a factoring company at a discount (the factoring fee). The factoring company will immediately pay you an advance on the balance and then work to collect the full balance from your customers. Say you have an outstanding bill for $10,000. A factoring company buys it and advances 90% of the full value, giving you $9,000 up front as a deposit. The remaining $1,000 will be held in reserve until the bill is paid in full. Once the invoice factoring company receives the full invoice amount, it releases the reserve and transfers the $1,000 balance owed to your business account. The factoring fee is deducted from either the prepayment or the reserve.
This financing option is a smart choice for small businesses that need cash fast. They can sell their bills and get paid the same day, which can be crucial for businesses that need to do payroll, pay their rent, or buy materials for the next project, whatever they need the money for. The best part is that the bills are their security, so they don’t have to put up any assets of the company to get the money they need.
Small Business Grants
Scholarships are essentially free money. So if you can get a scholarship, take it. This money is set aside to help small businesses start or grow and you don’t have to worry about paying them back. Nonprofit organizations, corporations, and governments are usually behind the grants, and they are extremely difficult to come by. That’s because everyone loves free money and the competition for these grants is fierce, but applying for grants is also hard work.
Often companies hire outside companies to write their grant proposals for them, as business owners may not have the skills required to write a proposal that convinces someone to give them money. So in this case you might have to spend some money to get a lot more money. However, keep in mind: some grants require the money to be spent on specific things, so you may not be able to use that money to solve cash flow problems.
A newer type of small business financing that has been successful for many businesses is mentioned crowdfunding. Here you are trying to get several investors to give money to your company to make your idea or product a reality. While it sounds like a good idea, and it’s a good idea if you can get a lot of people interested in your business, again it takes a lot of work to reach the right people.
Depending on how much money you need to raise, a crowdfunding effort can be worthwhile. However, if you need a lot of cash fast, it might be best to try other options.
If you’re struggling with your small business’s cash flow, try one of these financing options. Just be sure to carefully weigh the pros and cons of each to make sure the one you choose works for you.