Do you want to raise money for your startup but don’t know where to source funds? If YES, here are 50 best small business financing options and tips for 2020. Many aspiring entrepreneurs already have great and lofty ideas of how to start and run profitable businesses, but there is almost always a snag in these well thought out ideas…capital.
Capital is the engine that drives businesses, and without it, no business can function. Small businesses rarely have much luck when seeking for bank loans, and even if the business is fully established, funds can still be tough to come by.
For this reason, we have outlined 50 different business financing options a fledgling business can take advantage of to raise startup capital, and we have equally taken it further to list three pros and cons of each option to enable you make the best decision.
50 Best Small Business Financing Options and Tips for 2020
Table of Content
1. Venture capitalists
A venture capitalist is an investor who either provides capital to startup ventures or supports small companies that wish to expand but do not have access to funds. Venture capital is money that is given to help build new startups that are considered to have both high-growth and high-risk potential.
Fast-growth companies with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company frequently. As long as a business is viable and is built with the future in mind, it has a great chance of getting sponsorship from venture capitalists.
- Venture capitalists have deep pockets and as such they can provide more money to grow a business, even more than can be provided by other lending companies.
- They provide great insight and networking opportunities for businesses that partner with them.
- They provide expert help to businesses under them because there are already seasoned in running businesses.
- Venture capitalists are generally very selective of businesses they fund
- They tend to share in decision making in the company they are funding
- They business/company in question typically losses its ownership and identity
An angel investor is an individual who lends capital to others who need to raise capital to run their business. Angel investors invest in startup companies in exchange for a return on their investment. These investors have helped to startup many prominent companies in the united states today, and they still remain a great source of finance for small businesses.
- The business agreements they provide are more flexible when compared to other lending institutions.
- Angel investors bring their wealth of experience and networking abilities into the business.
- Angel Investors are willing to take calculated risks in a bid to move the company forward.
- Active involvement from angel investors can breed problems in the company.
- Angel investors often ask for a considerable stake in the business being that they provide capital, networking, stability etc for the business.
- The downside of an angel investor’s higher risk tolerance is that they also tend to have higher expectations.
3. Online lending
Online lenders have become a popular alternative to traditional business loans. These platforms have the advantage of speed, as an application takes only about an hour to complete, and the decision and accompanying funds can be issued within days. A good number of entrepreneurs have utilized this method to provide finance for their business.
- Application is relatively simple and can be accomplished in minutes.
- Another advantage is that it is easier to qualify for the loan.
- Online lenders typically do not charge prepayment penalties.
- Online loans can be very expensive
- Although online lenders typically do not charge prepayment penalties, they also don’t usually offer prepayment savings.
- The business they finance has to be in operation for at least one year, with revenues of at least $50,000, if not, no deal.
4. Business Credit Cards
This is another good way small businesses can get funding to startup. If your business needs less than $50,000 in capital and you can’t get a loan, credit cards may provide the cash infusion you need. According to the U.S. Small Business Administration, up to 65 percent of small businesses use credit cards regularly.
Generally, credit cards are useful for extending cash flow. You should seek out and take advantage of perks and credit card rewards such as balance transfer deals, 0% introductory rates and cards that offer discounts for gas and office supplies, airline miles or cash back etc.
Again, you need to consider getting a small business credit card (especially if your business is incorporated) to keep personal and business finances separate from each other. If you handle it well, it can help you establish a good credit history for when your business seeks funding later on in its existence.
But you need to keep watch so as not to fall behind on your payments as it can damage your credit score. Be sure to restrict your card use to essential business functions, and keep your balance at or below 30 percent of your credit limit.
- Using credit cards to fund a business is easy. If you already have a credit card with available credit, then you are all set. Credit is immediately available with no work on your part.
- Credit cards provide convenience of revolving credit. This means you can borrow up to your credit card limit, pay your balance off and borrow again.
- You do not need collateral to draw on a credit card.
- Credit cards have unlimited liability.
- Credit cards have relatively low limits and as such are not suitable for every business idea.
- This method of funding can be expensive in the long run.
5. Borrow from friends or family
This is one of the easiest methods people use to fund their small businesses. Many startup owners look to friends and family for initial funding if their business is taking off from the very scratch. It would be helpful to find a friend or relative who can offer business guidance as well as cash.
Prepare a business plan just as you would for any other business loan. Ask for just enough money to take the business to the next stage — and if you prove to your lender that you can repay on time, it will be easier to ask for more money later if you need it.
- It is quite convenient.
- Cash is available much faster than other finance options.
- Loan is much easier to obtain without much restrictions and hassles.
- Generally a limited source of funding
- Could put great strains on your relationship
- There are higher chances of default with this method
6. Line of credit
If your business has uneven cash flow, a line of credit can offer open-ended access to cash for ongoing needs such as seasonal payroll or inventory management. A line of credit is basically an arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the lender permits the borrower to access or maintain.
It should be noted that a line of credit isn’t appropriate for long-term investments such as buying property or making large equipment purchases.
- Borrowers are only charged interest on the funds they draw.
- This business financing option has built-in flexibility.
- A line of credit is a type of revolving account which means that the borrower can spend the money, repay it and spend it again, in a virtually never-ending, revolving cycle.
- An open credit line presents risks of impulse spending because of its flexibility
- The lender can increase your APR, and therefore your monthly payments, in the future
- Line of credit aren’t regulated in the same way credit cards are
7. Personal Savings
This is generally the first small business financing option for most people who find that they don’t qualify for credit cards, microloans, or any other type of bank financing. Before you take this route, you have to consider certain things such as what percentage of your personal savings you should use. Should you pour all your savings into your budding business? Should you use 50 percent less? You need to be thorough with your business plans so you do not lose your ‘rainy day shield’.
- You will be motivated to run a better and profitable business if you are using your own funds.
- You have complete control over your business as you are the sole financier.
- You have a lot of peace of mind as you are not looking to repay a loan.
- The risk of personal debt and bankruptcy is high.
- Your personal capital might not be enough especially if your business needs some form of equipment.
- You risk running on a very narrow budget.
8. 401(k) Retirement Funds
It can be risky to use 401(k) or IRA savings to fund a business acquisition; but with the right strategy, it is possible to roll retirement savings into stock for a new business, and circumventing taxes and early withdrawal penalties.
The upside is that you can leverage your own capital to fund the start or acquire the franchise of a business. But if the business fails, you stand to lose the money you were counting on to fund your retirement.
- There is no long credit check, the application process is relatively simple and you can get the money quickly.
- A 401(k) loan has a cheaper interest rate than what you would pay on a bank loan or credit card, and you are basically paying that interest back to yourself.
- There is no income tax or withdrawal penalty on a 401(k) loan unless there is a default.
- One of the inherent disadvantages of putting money in a retirement account is that you’re penalized for taking an early withdrawal before reaching age 59½.
- You have limited investment options with this method of finance.
- Due to the administrative responsibilities required by 401k plans, they are relatively expensive to run.
Microloans are small loans typically issued to borrowers who are low income earners or have less than perfect credit and do not qualify for traditional bank financing. The loans are meant for entrepreneurs who have little to no collateral, and as such, they are suitable for starting small businesses. Microloans sometimes have restrictions on what you can spend the money on, but they typically cover operation costs and working capital, or things like equipment, furniture and supplies.
- Microlending allows poor, unemployed, or otherwise incapable people to become self-employed and start business projects.
- When compared to a traditional loan, microloans tend to be easier to obtain.
- Microlenders offer entrepreneurs advice on how to increase their business success.
- Some microloans end up going to minors because of the laws surrounding it.
- Microloans tend to have inflated interest.
- It has limited funding because typically microloans have an average amount of $13,000.
10. Factoring/invoice advances
Factoring invoices has been gaining popularity as a way to finance companies that have cash flow problems due to slow-paying commercial clients. Factoring works by providing an advance on invoices. This advance provides cash flow to operate the business and grow.
This way, the business can grow by providing the funds necessary to keep it going while waiting for customers to pay up outstanding invoices. These advances allow companies to close the pay gap between billed work and payments to suppliers and contractors, and a good number of small businesses utilize this method to create liquidity for their business.
- Factoring can save one the time that would have been spent collecting payments from customers.
- It basically doesn’t require collateral.
- Factoring provides easier funding than traditional loans.
- When you accept cash advances for your unpaid invoices, you might be giving up some control of your business.
- Invoice factoring sometimes come at higher price than a loan from a bank. Typical rates can range from 1% per 30 days to 4% per 30 days.
- Finance companies don’t handle bad debt
Crowdfunding involves raising funds to run a business from a large number of people. The funds can be considered as donations, loans or investments. Typically, crowdfunding works by people contributing a fixed amount of cash to the business, idea or project, for which they may receive a reward.
This industry has been doubling almost every year, becoming a multi-billion dollar institution that has helped entrepreneurs from every walk of life introduce new ideas to the marketplace. Crowdfunding is proving to be the go-to funding method for great business ideas.
- Except for equity crowdfunding, there are no limits to what can be raised.
- It is an easier form of raising money as it allows you to raise money from unaccredited investors without the myriad legal issues that often arise with these investors.
- Crowdfunding makes it possible for good ideas that do not appeal to conventional investors to get financing from the crowd.
- A person seeking to use crowdfunding to finance his business idea is required to disclose the details of the business to the public, and this exposes the owner to the risk of his/her project being copied by competitors who have better financing.
- Crowdfunding is not beneficial for all business ideas especially those that require millions of dollars.
- You are going to be paying fees on the cash that you raised.
A grant is a means of financial assistance designed to help a business grow and expand. Businesses focused on science or research may be able to get grants from the government. The SBA offers grants through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs.
Recipients of these grants are required to meet federal research and development goals, and have a high potential for commercialization. Grants can be an attractive source for financing, because they inject capital that doesn’t have to be paid back into the business.
- The primary advantage of grants is that, unlike loans, they don’t have to be repaid.
- They also don’t require the owners to surrender any equity in the business.
- Winning a grant enhances the prestige of the business that gets the grant and as such helps it carve a niche in the marketplace.
- Grants are difficult to get because there aren’t many of them available.
- Grants may be free money, but they rarely come without strings as the donor expects you to act in the agreed-upon way to secure the funding.
- Grants tend to be suspended with little notice.
- Merchant cash advance
A merchant cash advance is a small business loan made available to businesses that use card payments and is then paid back from a percentage of a businesses’ daily takings. In a merchant cash advance, a merchant gives businesses upfront cash or capital in exchange for a percentage or a portion of future credit card sales. For small business owners who need fast access to capital to grow their business, merchant cash advance is a great option.
- One of the biggest positive factors of merchant cash advance is getting the cash quickly as it does not take long to process.
- Since everything is done online, so there is no lengthy paperwork to fill out, fax, scan or mail.
- Repayment may be easier over time because there is no fixed monthly amount to be paid back, rather repayment is based on the percentage of sales.
- Merchant cash advance sometimes includes higher interest rates.
- This segment of the lending industry is not regulated because their repayment terms are tied to future credit card sales
- Companies that offer merchant service cash advances often charge a variety of different fees
- Get Partners
You can reach out to interested individuals outside of your inner circle or even business area and bring them into the business as investors and partners. By working alongside a partner, you will have the peace of mind of knowing that you are working with an experienced professional who can be a much more attractive candidate to banks or other financing entities that you may want to borrow money from for your startup.
- You get to share the cost of starting up your business with them.
- Shared responsibilities and work.
- Shared business risks and expenses
- Partners in a general partnership are jointly and individually liable for the business activities of the other, good or bad.
- Profits accrued in the business get to be shared.
- You do not have total control over the business. Decisions are shared, and differences of opinion can lead to disagreements.
- Debt Financing
The majority of new small businesses are funded with debt financing, predominately via bank loans or bonds. Debt financing is the act of borrowing money from an outside party with the agreement that you will pay the initial principal back with a negotiated level of interest. Of course it has nothing to do with debt.
- It helps to build credit history.
- The amount you pay in interest is tax deductible, effectively reducing your net obligation.
- When you agree to debt financing from a lending institution, the lender has no say in how you manage your company.
- Debt financing requires you to pay interest.
- You need to have a good enough credit rating to receive financing.
- By agreeing to provide collateral to the lender, you could put some business assets at potential risk. You might also be asked to personally guarantee the loan, potentially putting your own assets at risk.
- Strategic Entity Investors
Strategic entity investors are parties that invest in shares of a company to gain a business stake in the company. By making investments into early stage startups, these incumbents can get early, preferential access to promising companies.
Strategic investors are attracted to businesses that complement their own business objectives, and the benefit of such investors is the ability to leverage their business to help grow yours, and most especially to provide the much needed funding.
- Allows you to leverage on their previous success
- Generally more focused on holistic business success than a return
- Strategic investor can be able to accelerate and help a business in a way that even a venture capitalist cant
- Can force dramatic business changes to satisfy the relationship
- May restrict who you are able to deal with (e.g competitors)
- There is always lack of trust especially if one is dealing with a competitor
- Equity Financing
Equity financing is basically giving up a share of ownership in the business in exchange for capital to operate the business. For example, if you have a new business idea but no money to invest, and insufficient credit history to obtain a commercial loan, then you can go into a partnership with somebody who has money to invest.
The person who invests the capital to start the business, or to keep the business afloat, will take an equity position, or ownership position in your business. In a sense, an equity investor becomes your business partner.
- No loan to repay.
- Equity partners can expand your business network.
- No need to be credit worthy.
- You have to cede some control of your business over to the equity investor.
- You would have to share profit accrued from the business, and depending on the percentage, the sharing might not be altogether fair to you.
- Potential for future conflict.
- Personal Investment
The most common funding option for small businesses is a personal investment from the small business owner. In other words, the small business owner uses his or her own personal savings or personal assets to fund the small business.
While this option is the most common, it is also, in many respects, the least desirable funding option because it involves the most risk for the small business owner. Small business owners get to put their personal financial well-being on the line.
- You will be motivated to run your business better without being careless.
- It is an easier and most cost-effective way to provide your own financing.
- Self-financing your business gives you much more control than other finance options.
- Risk of personal debt and bankruptcy
- You would have to run the business on your own without outside help that can be gotten from venture capitalists and other business funders
- Using money from your investment to finance your business may put a strain on your family and personal life
- SBA 7(a) Loans
This is the SBA’s primary and most popular loan program. SBA 7(a) loans are available for businesses that meet the SBA’s size standards, operate for profit in the United States, and have equity to invest. Businesses must attempt to secure financing elsewhere, including using personal financial assets, before applying.
There are specialized 7(a) program options for exporting companies, those in underserved communities, those with military ties (such as a veteran business owner or businesses owned by the spouse of an active service member), and those with cyclical or seasonal businesses that need help with short-term financial needs.
- SBA loan programs remain one of the best sources of capital to open a start-up franchise unit or purchase an existing re-sale unit.
- SBA loans are structured with no balloon payments.
- SBA loans are suitable for business ventures that require a lot of cash in funding even up to $1.5 million.
- There may be more documentation required for SBA loans because they are directly funded by lenders and backed by the U.S. government.
- All SBA loans require the personal guarantees of owners with an interest of 20 percent or more in the business entity.
- The SBA has established size-standard guidelines for specific business types would qualify for SBA loans.
- CDC/504 Loans
The SBA’s CDC/504 loans are designed specifically for the purchase of long-term fixed assets such as land, buildings, and machinery. Additionally, you can use these government small business loans to construct new facilities or renovate existing ones. You cannot use CDC/504 loans for working capital or to refinance old debts. CDC/504 loans are long term, so they mature in anywhere from 10 to 20 years.
Maximum loan amounts depend on the intended purpose of the funds. Amounts also depend on whether or not they help create jobs or support public policy goals such as energy reduction, minority business development, or business district revitalization. Generally, these government business loans cap out at around $5 million.
- SBA loan programs remain one of the best sources of capital to open a start-up franchise unit or purchase an existing re-sale unit
- SBA loans are structured with no balloon payments.
- SBA loans are suitable for business ventures that require a lot of cash in funding.
- SBA CDC/504 loans are only to be used for specific purposes.
- All SBA loans require the personal guarantees of owners with an interest of 20 percent or more in the business entity.
- The SBA has established size-standard guidelines for specific business types would qualify for SBA loans.
- Professional loans
Professional loans are personal loans for professionals like accountants, dentists, journalists, engineers, solicitors, surveyor, architects, and management consultants etc., who have the proper skills and are qualified to practice their trades.
Professional loans can be availed for requirements pertaining to their businesses such as purchase of equipment, construction, business premises renovation, working capital, among others. These loans are meant to help a self-employed professional increase or improve his/her business and overcome liquidity crunch when buying equipment or investing in their own business.
- Attractive interest rates and repayment tenures.
- Easy and simple application process.
- There is generally no prepayment penalty on professional loans.
- Self-assembled equipment such as computers are generally not eligible for financing.
- Stringent qualification criteria.
- Funding may not be adequate to run a business
- Accounts Receivable Factoring
Accounts Receivable Factoring is a form of asset-based financing and it is the process of selling commercial accounts receivables by a business in order to obtain immediate cash payment of the accounts before their actual due date. AR factoring differs from borrowing in that the accounts receivables are actually sold rather than merely offered as collateral. The net result is that your company can convert its receivables into immediate operating cash so that you will not have to wait days on end for your customers to pay.
- Accounts receivable financing ensures you get cash quickly as you can often receive cash within 5-to-10 days, and sometimes even faster, within 1 to 2 days.
- Accounts receivable financing can save you time and effort that would otherwise be spent on collecting money due from customers.
- A business factoring loan is a type of unsecured financing so it won’t require collateral from your personal or business assets.
- While receivables financing does not affect the ownership of your business, you may have to give up some control of certain business processes
- Factoring companies usually keep between one and four percent of a receivable as their fee. Additionally, they do charge interest on the cash advanced to the business owner.
- Some of the receivables financing agreements can be quite lengthy—up to two or three years in some cases and this is not always good for a business.
- Business acquisition loan
A business acquisition loan is used for financing a new acquisition, refinancing, or franchise purchase. A business acquisition loan allows you to buy a company that is already up and running, open a new franchise location of an established company, or buy out your partner in a business you already own.
- Business acquisition loans have relatively low APR.
- SBA financing may be available.
- It may be easier than securing startup financing.
- Lengthy application process
- Collateral sometimes required
- Down payment (up to 50%) sometimes required
- Line of Credit – LOC
A line of credit, abbreviated as LOC, is an arrangement between a financial institution, usually a bank, and a customer that establishes a maximum loan balance that the lender permits the borrower to access or maintain. The borrower can access funds from the line of credit at any time as long as he does not exceed the maximum amount set in the agreement and as long as he meets any other requirements set by the financial institution, such as making timely minimum payments. This credit can then be used to finance a business.
- The main advantage of a line of credit is its built-in flexibility.
- Small businesses need to build credit history to obtain future credit accounts and loans. Using a line of credit allows you to build a positive business credit history as you use the line and make the payments on time.
- One of the best aspects of negotiating a line of credit is the relationship you build with the lender. Over time, this may help you when you need additional financing for other projects.
- The costs involved in establishing and maintaining a line of credit are one of the drawbacks of a business line of credit. It requires up-front fees to obtain the line, and the business must pay interest on the money it uses from the line of credit.
- Line of credit usually has cash flow problems.
- A business line of credit can also put your small business at risk, and even if your business fails, a line of credit has to be repaid because it is a business obligation.
- Equipment Financing
Equipment financing loan is a credit extended to businesses for tool purchases. It typically covers leasing, SBA and other government loans. When your business needs equipment but you don’t have the cash to buy it outright, you have two options: leasing or financing. Once you have reached the end of the initial agreement, you’ll have the option to renew or terminate the lease or to purchase the equipment for its fair market value.
- With an equipment loan, lenders are less concerned about your credit score and financial history since the equipment you are purchasing will be used to secure your loan. As such it involves less documentation.
- Taking out an equipment financing loan is a way of helping businesses get the equipment they need without having to pay some of the upfront costs of a purchase.
- Equipment financing is often entirely tax deductible for small business owners.
- Equipment financing can require high down payment.
- It requires strong credit for good terms.
- Financed equipment can become outdated, but you are stuck with it at the end of your payment term.
- Purchase Order Financing
Purchase order financing is one of the small business financing options that solve the cash flow gaps of small businesses by giving you funding for specific single (or multiple) orders from vendors. The way purchase order financing works is that a financing company pays your vendor for your order, you get the goods, and then you pay the financing company back at a later date.
Depending on the specific purchase order financing company and your business’s qualifications, they may pay for a portion or all of the order.
This type of financing option for small businesses works particularly well for businesses with specific purchases in mind. The orders can range from repeat transactions (like monthly B2B service fees), to seasonal cash flow gaps, or new projects to accelerate business growth. Of all small business financing options, this is a great option for new businesses who haven’t had a chance yet to build up their credit.
- Purchase order financing is a cost-effective service as purchase order financing is cheaper than using credit cards to make bank payments.
- There are no hassles of installments as it is not a loan.
- This type of financing is convenient and it is usually granted within a short space of time, usually within 24 hours.
- Factoring fee is charged upfront.
- The customers don’t communicate with your directly as the factoring firms take the payment on your behalf.
- Purchase order financing cannot make up for long-term financing for contracts because they are designed to take care of short term capital needs.
- Short Term Loans
Short-term loans are a great way to get cash quickly and they usually get paid off quickly. The terms for a short term loan are usually 3 to 18 months, meaning the debt isn’t on your books very long. Short term loans are one of the most unique small business financing options in that you pay back the loan daily or monthly. Lenders will automatically debit money from your bank account each business day. Short term loans require little paperwork to apply (most often just 3 months of bank statements), and you can get the funds in days.
- Short-term lenders typically have more relaxed eligibility requirements than conventional banks or SBA loans do.
- Quick payment plans no longer than 18 months.
- Businesses with immediate capital needs can usually secure short-term loans in a matter of hours or days.
- It has high-cycle risk.
- A short-term loan is almost always at a higher interest rate than a long-term loan.
- Organizations that issue these types of loans tend to charge excessive fees.
Competitions are events created for entrepreneurs with new business ideas who need seed funding. You are required to present your idea and it would be pitched against other ideas from other entrepreneurs. If your business idea provides the greater chance of viability, then you get to win the competition, and automatically get funding for your business.
- Many competitions provide prize money, investment capital or in-kind awards.
- Most competitions put forward mentors who offer advice and may open doors to money, customers, vendors and talent.
- The honor of winning a competition adds weight to your business’s credentials and exposes you to the media and others in the competition’s circle of influence.
- Participating in a competition requires a lot of time and effort.
- Success in a competition is never guaranteed.
- You risk getting your ideas stolen by exposing it to the public.
- Community Development Funding Institutions (CDFIs)
These institutions lend money to small businesses such as women and minority-owned firms that commercial banks deem risky. CDFIs support their borrowers with training and technical assistance to ensure their success, making these alternative lenders a long-established social investment option. Some CDFIs will help you (re)build your credit score. Through the Tory Burch Foundation and Upper Manhattan Business Loan Program, small-business owners may qualify for reduced interest rate loans.
- Supporting local economies through creating jobs and increasing economic development.
- Providing technical assistance and consulting to minorities.
- Higher-risk tolerance in lending.
- Offer limited capital.
- Gives unrealistic repayment schedules.
- They are dependent on recycled debt.
- Hard money loans
Hard money is a way to borrow without using traditional mortgage lenders. Loans come from individuals or investors who lend money based mostly on the property you are using as collateral.
Hard money loans are a good fit for borrowers who need money quickly, who may not qualify for traditional financing, and can back the loan with real estate. A hard money loan can help real estate investors buy residential or commercial real estate.
They can also be used to obtain working capital for a business by using your personal or commercial real estate as collateral to back the loan. Hard money loans typically have short repayment periods, and can be a relatively expensive loan.
- Hard money loans can be closed more quickly than traditional loans.
- Hard money agreements can also be more flexible than traditional loan agreements.
- It has more collateral options.
- Hard money loans are expensive
- Many hard money loans are only available as a short-term means of financing
- Higher interest and fee rates to be paid up-front
- Peer-to-peer lending
Peer-to-peer lending also known as person-to-person, P2P or social lending, anonymously matches up borrowers and lenders via an online platform using complex computer algorithms. Peer-to-peer lending can be the answer to all kinds of situations in which you need to get your hands on some cash especially cash to start your business.
- Easy, fast online application process.
- No impact on credit score for checking your interest rate.
- Lower interest rates compared with some credit cards and traditional financial institutions.
- You can’t always borrow your way out of debt.
- If you have less than good credit, you wiill get stuck with a high interest rate.
- Peer-to-peer loans are not insured like many other investments.
- Credit Unions
Credit unions are non-profit financial institutions that do most of what banks do, and they are typically small, local institutions, serving a specific local population. Many credit unions issue small business loans, and they approve requests at twice the rate of big banks. Rates are competitive and sometimes lower since credit unions are nonprofits with less overhead.
You would need to be a member to access these loans, though requirements are often as simple as living in a specific area.
- Credit unions are more flexible than banks in assessing borrowers for loans.
- They often have better interest rates and lower fees than regular, for-profit banks.
- Credit unions are member owned, so they have no shareholders to be accountable to.
- A credit union is open only to members of a certain group.
- Credit unions are not perfect for everyone.
- Interest rates vary and can be high sometimes.
- Leveraged Finance
Leveraged finance refers to a heavier-than-normal amount of debt financing. This typically takes a different form than a bank loan or line of credit. This is another business financing option suitable for small businesses.
- This is a type of financing is best used for temporary needs and special situations.
- It is designed to help small companies in a pinch.
- Ideal for acquisitions and business buyouts.
- A risky and complex form of financing, it is best to use it sparingly.
- Higher exposure to risk.
- It can prove to be very costly.
- Use your Salary
There are a good number of people working in the corporate sector who are effectively running side businesses along with their jobs. If you are working for another company and getting handsome salary, then fund your startup through your monthly or weekly remuneration, as the case may be. This type of business funding provides more advantages than it does disadvantages.
- You will be motivated to run a better and profitable business.
- You have complete control over your business.
- You have a lot of peace of mind as you are not looking to repay a loan.
- The risk of personal debt and bankruptcy is high.
- Your personal capital might not be enough.
- You risk running on a very narrow budget.
- Royalty Financing
Royalty financing is a new financing option which is quite different from equity financing and debt financing. In a royalty financing arrangement, a business receives a specific amount of money from an investor or group of investors.
If you go for royalty financing, then you will receive advance payment from the investor/group of investors so that you can launch/manufacture your business commodities. In exchange, the people who invest in your business will receive the specific percentage of your future revenues.
The good side of this alternative is that you will not lose any equity in your business. All you will need is to share your future profit with the investors.
- Royalty financing enables entrepreneurs to obtain capital without giving up a significant ownership position in the company to outside investors.
- Royalty financing arrangements are not subject to state and federal securities laws.
- Royalty financing provides more convenient payback terms and less severe penalties for default.
- Royalty financing may not be a good option for companies with very tight profit margins.
- Businesses get to pay a percentage of their sales as royalties.
- May not be able to provide a certain amount of funding.
- Pre-sale of your Commodities
If you are supposed to be an expert in manufacturing some specific commodities and also have good fame in the market, then presale your commodities to buyers. In this technique, you’ll receive advance payment from the buyers and you’ll have to deliver the agreed commodities in some future date. This is a good way to keep your business liquid till you start making money.
- You get to retain full ownership of your business.
- Since this is not a loan, you don’t get to accrue any interests.
- It is a less tasking way to provide funding for your business.
- It may be difficult to sell nonexistent products to buyers
- Customer relationship can get messy if there is a default. Your business maybe sued.
- This method may not provide adequate funding for the business
- Incubation Centres
Nowadays, incubation centers are playing a key role in entrepreneurial growth. They not only incubate new startup ideas but also help the owners to launch and expand their businesses. Incubation centers are run by experienced entrepreneurs that invest in your idea, gives you space to work along with infrastructure, provides guidance to help you succeed, and introduces you to potential investors.
- Incubators provide initial financing to entrepreneurs; give office space and infrastructure.
- They provide guidance to businesses using people who have succeeded before, and they also make connections with investors.
- Working with the right incubators gives a lot of credibility to the entrepreneurs as the big brother figure.
- Not all incubators are created equally. It is easy for anyone to set up an incubator, but not many can add value to entrepreneurs.
- Some take too much equity from entrepreneurs.
- Not all businesses qualify for incubator financing
- Supplier Credit
Many suppliers have developed credit programs where they provide the goods on credit; you pay for them, with interest, over a specified period. This is quick way to get short-term credit for your operations. Use it when you can, but make sure the credit is worth more to you than the discount of paying immediately.
- You can get goods or services but not pay for them until some specified later date.
- Receiving business credit helps improve your cash flow dramatically.
- It reduces the need for short-term loans.
- Not all suppliers give credit.
- Suppliers might charge you more if you take the product with delayed payment (or give you a discount to pay immediately).
- Most companies offer supplier credit only to established businesses.
- Customer Lenders
A little over a decade ago, some farmers began using community-supported agricultural loans, or CSAs, to finance their operations. Customers would provide cash before the planting season and receive produce at discounted prices when the harvest arrived.
Soon, that model spread to the retail industry, with local food markets borrowing from their shoppers. For example, in exchange for cash, customers at a specialty grocer in Boston received a set discount on food items throughout the year. It not only made sense financially, but helped sustain local businesses that customers felt were important to the community.
- It is a clever, outside-the-box solution to a financial shortfall.
- Since this is not a loan, you are not liable to any interest payment.
- It helps customers better connect with local businesses.
- It is not a viable financing option for every business.
- For this method to work, the entrepreneur must have strong connection with his or her community.
- It would take a lot of savvy marketing to get this method to work.
- Bootstrapping your business
Bootstrapping is the act of starting a business with no money — or, at least, very little money. Here, you get to plow back into the business the money earned from customers. Bootstrapped businesses avoid investing except where absolutely necessary and work within their means, finding ingenious ways to get by with less. The basic fact to note is that most bootstrapped businesses get to be profitable in the long run though it takes a lot of work.
- If you can build your product and drive revenue, you will be better positioned to manage your business effectively.
- You have early creative control on your business before others get to come in.
- Bootstrapping does not allow extravagance so you tend to become more prudent.
- When you bootstrap, it is difficult to grow a business aggressively, as such, you growth rate is slow.
- If you invest all your resources in a business and the business fails, you will be the one to bear all the risks.
- You are denied access to support from venture capitalists and other funders alike.
- Purchase order financing
The most common scaling problem faced by startups is the inability to accept a large new order, since they don’t have the cash to build and deliver the product. Purchase order financing companies will often advance the required funds directly to the supplier, allowing the transaction to complete and profit to flow to the startup.
As a business owner, you can choose purchase order financing if you feel that bank financing doesn’t turn out to be a viable option for you. These service providers agree to lend you some money based on the worth of the purchase orders you sell them.
- As a business owner, you get to pass on a lot of your risk to the chosen factoring firm.
- Purchase order financing is cheaper than using credit cards to make bank payments.
- The service is normally very convenient and you get easy access to cash. In fact, you can get cash in the space of 24 hours.
- You don’t get the total amount when going with this option because a part of what you request is normally withheld and paid on a later date.
- Factoring fee is charged upfront.
- This financial instrument is good only for short term financing.
- Whole-life insurance
You can borrow against your whole-life insurance policy to fund your business, but be careful not to default, terminate your policy, or even to die. Getting a life insurance policy loan is quick and easy. Since you are borrowing against your own assets, there is no approval process, credit check or income verification. Policy loans generally have a much lower interest rate than bank loans and are devoid of high fees and closing costs. In most cases, they are also tax-free.
- It is simple and relatively quick.
- You can borrow about 95% of the cash value amount of your whole life policy from most mutual insurance companies.
- When you borrow against your insurance policy, you can design your own repayment schedule.
- If you were to die before paying back your policy loan, the loan balance plus interest accrued is taken out of the death benefit given to your beneficiaries.
- When the loan sits unpaid, the interest that accrues is added to the principal balance of the loan.
- Outstanding loan balances may trigger tax actions.
- Overdraw your checking account
Overdraft protection helps consumers temporarily cover purchases when an account is not sufficiently funded. Overdraft protection may be offered as a line of credit, or consumers can link multiple accounts as backup payment sources. The good thing about overdraft protection is that if you don’t have enough money in your checking account, your check will clear. This type of funding is good to help out businesses in a pinch.
- It is easy to access.
- This service will pay a check or allow a transaction to go through even if you do not have enough money in your account.
- You can get access to the cash you need in an emergency situations in your business.
- These services come with hefty fees that increase debt.
- It only comes in a limited amount as you cannot get healthy funding for your business from here.
- It encourages overspending.
- Liquidate assets
We get to accumulate a lot of expensive stuff from time to time. In the event that you want to start your business and you need funds, you could all those expensive and valuable commodities to raise funds. Things like the latest model of iPhone, video game, television etc. This should in fact be your first port of call if you are aiming to start a small business.
- You get to fund your business solely without external help.
- It helps you start your business on a good note by not being in debt.
- You get to run your business the way you want.
- You may have to bootstrap the business because you may not raise sufficient funds.
- You may not have room for expansion due to financial constraints.
- You would lose valuable advice that can be gotten from professional partners.
- Utilizing Financial Professionals via Verifico.com
Verifico is a one-of-a-kind online marketplace where you can search and connect with financial professionals that help you navigate the financial landscape and secure bank financing on your behalf.
- Verifico’s Six-Step Verification process eliminates the chance of encountering fraudulent consultants.
- The platform streamlines the funding process which makes it possible to receive financing without ever setting foot in a bank or leaving your office.
- The financial professionals use their knowledge and experience to position your company in a way that is most appealing to the lender.
- Upon receiving funding, you must pay a small percentage to the financial professional for his or her service.
- You are not in direct contact with your lending institution.
- Sometimes interests may be high
- Merge with another business
If all fails in your bid to acquire the required capital to run your business, you can opt to allow your business to be acquired by another, at a price of course. Merging your business with another is a wise decision that can help you pool capital to run the business.
- Small businesses stand to benefit from mergers since this is the best business growth strategy.
- If there is a reverse merge, a business stands to benefit.
- If done correctly, merging businesses are legally simple and won’t cost you much when compared to an outright acquisition.
- Mergers can sometimes lead to takeovers.
- You get to lose full control of your business.
- There can also be a clash of goals and objectives between the two businesses.
- Margin loan
Margin loans aren’t just for buying securities. You can get these loans with flexible repayment terms to fund your business, but you have to be careful not to default, or your brokerage firm can sell your securities.
- It boosts your purchasing power. When you have a relatively small amount of money to work with, margin can be used to boost your returns or help diversify your portfolio.
- Margin lending will allow you to borrow the funds needed to invest more – and potentially diversify your portfolio.
- Easy access to funds.
- The fate of your investment funds lie at the hands of the market so market volatility has to be taken into account.
- A margin call can arise if your outstanding loan balance surpasses the borrowing limit by more than the buffer.
- You are completely responsible for paying off your margin loan amount regardless of your investment portfolio.
- Industry leaders
Ask individuals and businesses that are leaders in your particular industry for a loan. They are more likely to be sympathetic to your needs and understand your goals than big banks. In addition, they can offer valuable business advise if they get to fund your business.
- You may get funding with no interest to pay.
- You would also gain from their experience.
- They would put your business in a better light.
- You may lose sole control of your business.
- You may get to share the proceeds of the business with your lenders.
- You may be risking a buyout especially if you partner with a competitor.
- Title loans
If you have paid off your car, you can get a title loan against its value, similar to a home equity loan. This method of business funding is suitable for a small viable business so that the funds would be enough for you, and so that you can easily pay it back.
- Title loans are available for people with bad credit.
- It provides quick cash in the case of a business emergency.
- Title loans are easy to get.
- A car title loan sometimes incurs high interest upon repayment of the loan.
- When you take out a car title loan, the lender will put a lien against your vehicle, meaning that if you are unable to repay the loan, the lender can repossess your vehicle to collect on the debt.
- You have to shop around for the best terms.
Traditional brick-and-mortar banks are still your best option for borrowing the largest amount of money at the lowest interest rates. They may also offer longer repayment terms if you need them.
- There is no limit to the cash you can get.
- Banks sometimes offer financial advice to small businesses.
- You can negotiate a suitable payment method.
- These loans require a lot of collateral and can be notoriously hard to secure.
- Application and approval can also be daunting as you need to complete a slew of paperwork.
- It takes too long to get approval.