Understanding Small Business Financing Options
Whether you’re just launching your business or looking to expand your operations, financing can help you reach your goals without having to spend your own capital. Small business owners have many options when it comes to financing, which can make it challenging to navigate the process. Understanding your options and weighing the pros and cons can help you make an informed decision.
Commercial Bank Loans
Commerical bank loans are the most obvious and simplest way to obtain financing for established small business. Start-ups may have more difficulty obtaining these loans, but a solid business plan can help aid in the approval process.
Commercial loans often have lower rates, higher lending limits and longer repayment periods.
Many local credit unions also offer commercial loans. Because credit unions are rooted in the community, they are often more receptive and flexible when it comes to their lending criteria.
While commercial bank loans often have more favorable terms, the approval and processing time is much longer. Processing can take 1-2 months. You will likely need to have an excellent credit history and score to even be considered for approval.
Many new small businesses don’t have the credit or cash flow to obtain a commercial bank loan. In this case, a personal loan may be a good option.
With commercial loans, banks want to see profitability and strong cash flow. New businesses typically don’t have either of these things. But you, the owner of the business, do have a credit history.
If you have a good credit score and history, your chances of being approved for a personal loan are much higher.
Just keep in mind that defaulting on the loan or making late payments will affect your personal credit score.
For established small businesses, invoice factoring offers an advance on funds from outstanding invoices. Instead of waiting for customers to pay, you can obtain the funds right now and then pay back the “loan” when customers pay.
Funds from invoice factoring can be used to purchase new equipment, bridge the gap in cash flow, hire new employees and grow your business.
Approval takes about one business day in most cases, which means that your business can get the financing it needs quickly.
One drawback with this type of financing is that you lose control over invoice collection.
Business Lines of Credit
A business line of credit is similar to a credit card in that you have access to funds up to your given credit limit. The great thing about a line of credit is that you only pay interest on the money you withdraw.
With a traditional loan, you pay interest on the entire loan amount regardless of whether you use it all at once.
Lines of credit also offer more flexibility than term loans, but they may have additional costs, like draw fees and maintenance fees.
Small businesses can also obtain loans from the Small Business Administration (SBA). These loans are offered by banks and other lenders, and businesses can borrow up to $5 million.
Repayment periods typically depend on how you’ll be using the money. Repayment periods are usually ten years for buying equipment, seven years for working capital and 25 years for real estate transactions.