No matter whether you’re expanding an existing small business or starting one from scratch, financing options exist that could help. Some of the more commonly utilized include traditional bank loans, business lines of credit and invoice financing.
Other funding methods may include credit cards or equity financing (selling shares). Each has their own set of advantages and disadvantages.
Traditional Bank Loans
Traditional banks and credit unions provide both secured and unsecured business loans, as well as lines of credit and equipment financing solutions. Traditional lenders tend to offer lower interest rates than alternative lenders; they may also have more stringent application requirements and may not fund industries deemed high risk, such as real estate or restaurants. Before starting the application process for one of these traditional loans, check out NerdWallet’s checklist so all necessary items are ready before getting started with your application process.
For bank loans to be accessible, typically outstanding personal credit and established business revenue will be necessary. Wells Fargo and Chase both provide financing specialists that can walk through your options with you over the phone – not to mention offering all their financial services under one roof, such as business checking/saving accounts/credit cards all in one convenient package.
Business Lines of Credit
As its name implies, this form of financing enables businesses to borrow funds on an as-needed basis. It can be useful in covering short-term expenses like purchasing supplies or increasing inventory. Furthermore, it may help cyclical companies meet revenue goals during slower times.
To assess eligibility for a business line of credit, lenders take into account both the borrower’s personal FICO score and financial history as well as that of their company. Many lenders prefer working with businesses which have been operating for at least one year with consistent annual revenue exceeding at least the minimum threshold required by this form of funding.
lenders typically require their borrowers to sign a personal guarantee agreement, which allows lenders to seize personal assets if funds are not repaid as promised. Lenders may also require additional documents like business plans and financial statements; requirements vary between lenders.
Invoice financing (also known as accounts receivable factoring or invoice discounting) enables businesses to receive a portion of the value of unpaid invoices from lenders upfront, while maintaining control and dealing directly with customers. Compared with loans or lines of credit, invoice financing often requires less paperwork and is easier to qualify for since invoices serve as collateral.
Invoice financing may be an ideal solution for small businesses that need extra working capital in order to purchase materials and supplies, expand their business or cover day-to-day expenses. Companies offering invoice financing often process applications quickly – sometimes within 48 hours! – funding your business within those terms. When selecting an invoice financer provider it is essential that they are knowledgeable of your industry as well as creditworthiness of customers to avoid paying additional fees that might otherwise accrue.
Your choice of business financing will have an enormous impact on the success of your enterprise in the long run, so it is vital that you fully explore all available methods before selecting one that is ideal.
If your small business doesn’t possess the required credit profile to qualify for bank loans, alternative lending partners may still exist to offer alternative forms of finance and lenders. Community development finance institutions nationwide provide loans for those that might otherwise have difficulty accessing capital elsewhere.
Other business-financing options for small businesses include working capital loans that provide immediate cash to cover earnings and expense obligations; equipment financing allows companies to pay for expensive assets like commercial trucks or restaurant ovens at relatively low rates; invoice financing (also known as factoring), wherein a service provider fronts companies money they owe from customers for a fee; as well as crowdfunding options that permit investments from multiple investors at once.