6 Ways To Secure Financing For Your Small Business

AS Team
Feb 20, 2023

Cash flow and finances are the backbones of any small business. With enough finances, small businesses can perform production, marketing, paying bills and wages, expand business operations, and protect themselves from cybersecurity. In contrast, with limited funds, the business can enter a spiral of debt and mismanagement, unable to pay for resources or perform necessary operations.

While small businesses are guaranteed a different amount of credit than big companies have access to, there are viable ways business owners can secure their businesses' financing. This article will discuss some of the best financing options for small businesses:

Use Small Business Loans

One of the most common types of loans that small businesses turn to is a small business loan. Small business loans can be installment loans or revolving lines of credit. So, as a business owner, is a small business loan an installment loan or a revolving line of credit? An installment loan means the borrower repays the loan in regular, fixed payments over a set period. A revolving line of credit means the borrower gets access to funds to a specific limit and has to pay an interest rate for the funds they've used.

With a small business loan, you'll need to ensure your credit score is good enough to qualify; otherwise, getting a loan may be difficult. The main advantage of small business loans is that they allow business owners to access more significant amounts of capital than other financing options.

Through Merchant Cash Advance

A merchant cash advance is a loan where the lender advances a certain amount to the business in exchange for future credit card sales. The merchant pays back the cash advance with a percentage of their daily or weekly credit card transactions. Merchant cash advances have been a popular alternative to traditional options for financing.

Some benefits of merchant cash advances include fast and easy access to cash, flexible repayment terms, and a quick approval process. This makes it a very desirable option for small businesses. However, you should note that the daily or weekly repayments can hurt the cash flow of your business, and it can also be an expensive option.

Through Angel Investors

Angel investors offer money to small businesses in exchange for equity. They often provide more significant capital than a traditional loan but expect more investment returns. These investments can be an excellent way for small businesses to get the funding they need without taking on large amounts of debt.

Furthermore, angel investors often look for companies with a high potential for success and a strong business plan. They also want to see evidence that the business has been successful in the past, so it's essential to document your successes if you are looking to attract angel investors. Some benefits of angel investors include access to capital, the possibility of mentorship, and the potential for long-term profits. However, there's also a risk of losing control and giving up too much of your company's equity.

Through Crowdfunding

Crowdfunding is an excellent option for businesses looking to finance their operations without taking out traditional loans or giving up equity. This method involves raising small amounts of capital from multiple sources, usually online. Popular crowdfunding sites have helped many businesses achieve success through crowdfunding campaigns.

In crowdfunding, the business owner will pitch their idea and ask individuals to donate money in exchange for rewards. The rewards could be anything from small tokens of gratitude to a share of your business's profits. This type of funding is great because it doesn't involve taking on debt or giving up equity but requires significant effort to raise funds. However, reaching the funding goals necessary to finance your business can take time, and there are fees associated with using crowdfunding platforms.

Through Invoice Factoring

Invoice factoring is a form of financing in which business owners can get cash immediately against their outstanding invoices. It involves selling unpaid invoices to a third party and getting money upfront. The factor will pay the business's invoice to its customer with a certain percentage of the original value being held back. The business will then pay the lender back once their customer pays the invoice, minus a fee.

Invoice factoring is another excellent way that small businesses can avoid giving up equity. It also doesn't require collateral, making it easier for small businesses with fewer assets to qualify for this. Moreover, as it's considered a sale and not a loan, it will not affect your credit card score. However, it's important to note that this type of financing can be expensive if you work with bad factoring companies. It will also reduce the profit margin of your business as you have to pay fees.

Small Business Administration (SBA) Loans

The Small Business Administration (SBA) provides small businesses with access to loans that have more favorable terms than traditional bank loans. The government partially guarantees these loans, often with lower interest rates, more extended repayment periods, and higher loan amounts. This makes them an attractive option for small businesses looking for financing.

SBA loans come in different forms, such as the following:

SBA 7(a): This loan program is designed to help businesses start and expand. They come in different subcategories. Standard SBA 7(a) is used for any small business. It can finance general business components such as equipment, debt refinancing, and working capital. Another subcategory is the SBA Express which is capped at USD$500,000 and used for equipment and operating capital.
SBA 504 Loan: This loan program is designed to help small businesses purchase fixed assets such as real estate or machinery. It comes with a 10-year repayment period and can provide financing up to USD$5 million. These loans are great because they give businesses access to long-term capital without giving up equity or taking on too much debt.
SBA Microloans: This loan program provides small businesses with access to financing up to USD$50,000. The loans are used to finance working capital and startup costs.

These loans are desirable for small businesses because they come with lower interest rates and extended repayment periods. However, there is a lengthy application process, so start the process early if you are considering this option.

Conclusion

Finding the right financing for your small business can be difficult, but it’s essential to ensure it succeeds. Many options are available, such as crowdfunding campaigns, invoice factoring, and SBA loans. Each has pros and cons, so weigh your options carefully before deciding which is best for you.

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6 Ways To Secure Financing For Your Small Business

Use Small Business Loans

Through Merchant Cash Advance

Through Angel Investors

Through Crowdfunding

Through Invoice Factoring

Small Business Administration (SBA) Loans

Conclusion

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