For those seeking funding for cash flow, materials, equipment, or growth, there are a seemly endless number of business financing options to choose from. So who do you choose which business funding option is best for you? Do you go to a bank or alternative lender? Credit union or credit card company?
With such a crowded market, start with the basics — by educating yourself. Our definitive guide to business financing options will help you learn what types of funding are available on the market, when to use each one, and how to calculate what you can afford to borrow. The fact is, the primary reason small businesses fail is lack of access to funding, so get started on the right foot and get the funding that’s best for your business.
Step 1: Pinpoint your small business financing needs
When considering business financing options, having detailed and attainable goals will make your business flourish. Before applying for any funding, think through all your requirements for the money you plan to borrow. Here are some questions to ask yourself:
How much you need
You need to know how much money you plan to borrow. Not every lender is willing to give any amount of money. Some lenders have minimum or maximum caps for loans they offer, so how much you need to borrow will affect which type of financing you pursue.
How you’ll use the money
Not all lenders give you free rein to use the money on anything. Some lenders specify that you must use the loan for a certain purpose. Thus, if you want funding that you can use for multiple aspects of your business, or you don’t want to be limited, make sure your lender agrees to it.
How fast you need it
Not every financing option hands over money at the same speed. Many traditional lenders take several weeks or longer to approve your loan request — and you might have to wait further to receive the money. Thus, if you need funding faster than that, you’ll likely have to look outside of standard banks. Online lenders don’t require as much legal and financial documentation to get approved, so the process is usually quicker.
How often you need it
Do you need the money once, like to purchase a new piece of heavy machinery? Or do you plan to use the funds again and again to pay your monthly payroll? Answer these questions before applying for funding because it will affect which options will work for you.
How much you can afford
Many lenders require your business to make at least a certain amount of money each year to qualify for borrowing. So, you’ll first need to calculate your annual revenue to make sure your business income is high enough. Also, all small business financing requires you to pay it back, sometimes in the form of a monthly payment or a fee per invoice. Think through how much you can afford to pay back — including any additional interest or fees.
The unique aspects of your business
No two businesses are the same; therefore, no two businesses have identical needs. Maybe you run a cross-border business or are a Mexican national operating in the U.S. Or you may be pursuing bankruptcy financing. For companies like these, be sure to look for a funder that is happy to work with you.
Step 2: Consider your approval options
When determining which small business financing option is right for your company, you also need to consider what you qualify for. Understanding where your company and personal credit stand will stop you from applying needlessly to financing you can’t get — especially since each time you apply, your credit score gets dinged a few points
According to the Small Business Association (SBA), small businesses took out $645 billion in business loans in 2019. So, there’s a significant amount of cash being given to small businesses, but that doesn’t mean yours qualifies for every lending choice.
Rather than applying for the first option you find, take time to figure out the following as it relates to your business:
- Business and personal credit scores. Two credit scores matter when you’re applying for a Small Business Association (SBA) loan or a bank loan: personal and business. Your personal credit score signifies your ability to pay back your personal debts, while a business builds its own credit score by paying back what it owes. If you have low credit scores or no credit history, you’ll have a hard time qualifying for a traditional loan and will need to look elsewhere.
- Credit history. Your credit history also matters. Any lender will look at your credit reports, which display your credit history. You’ll need to have solid reports without late or missed payments or other nicks to your credit history.
- Other loans. If you have too many loans already, you’ll likely struggle to qualify for another standard loan from banks or the SBA. The more money you borrow, the riskier of a customer you become since it looks like you can’t manage all your debts. Lots of debt makes traditional lenders wary of loaning to you. But some online lenders are more willing to look past other loans.
- Cash flow. Online lenders care about the cash flow of your company more than your credit score. No matter the lender, however, you’ll have to prove you can afford to pay back your current debts, as well as the new monthly payment for any money you borrow.
- Collateral. For certain loans, you will be required to put up collateral like property or machinery to qualify. Using collateral can help you to get a larger loan, but it also risks the bank seizing the collateral if you fail to pay back the loan.
- Time in business. If you want funding from a standard bank, your company must have been in business for at least two years. For businesses that started less than two years ago, you’ll need to go to an online funding option.
Step 3: Shop around for business financing options and apply
Once you know what your business needs and what you can qualify for, all that’s left for you to do is find a few lenders that offer the type of financing you are after.
Each of the lenders will give you an annual percentage rate (APR) they will charge you to finance. Use the APR to compare each of the lenders since this number includes fees, as well as the interest rate. Thus, it’s the most accurate way to compare two funders.
Then, get together the following documents:
- Tax returns (business and personal)
- Bank statements (business and personal)
- Financial statements (business)
- Legal documents for your business
- Your business plan
Finally, simply apply to the options that will work best for your business.
All Small Business Financing Options Compared
To help you decide between the huge array of small business financing options, it’s necessary to understand which types of loans and other funding are out there. We break down all your options below.
What it is: A bank gives you a loan that you pay off each month. Your monthly fee includes the interest charged by the bank. Some loans from banks only allow you to use the money toward specific purposes.
Who it’s best for: A company that has been in business for at least two years with a good credit history established and has access to collateral. It’s also great for anyone who doesn’t need the funding urgently since it can take several weeks or more to receive.
Amount: $5,000 to $5.5 million
Speed: Several weeks or more
Use: Depends on the lender
Fees: Interest, origination fee
Approvals: Revenue, cash flow, personal credit, collateral, time in business
Bank line of credit
What it is: A bank gives you an account with a set amount that you can pull from as needed, up to your credit limit. Pay it off in monthly installments or in full.
Who it’s best for: A company that has been in business for at least six months and needs access to less funding than a traditional bank loan. If the line of credit is low enough, you don’t need collateral.
Amount: $1,000 to $250,000
Speed: Several weeks or more
Fees: Interest, upfront fees, renewal fees
Approvals: Revenue, time in business, credit score of 500+
What it is: A business credit card allows your company to charge expenses up to the credit limit and pay them off later. You’ll need to make at least a monthly minimum payment including the interest charged by your credit institution.
Who it’s best for: Anyone who can prove a good credit history and needs immediate access to funding. The interest rate tends to be higher on credit cards than other types of funds, so be sure you can pay it off.
Amount: Depends on credit limit
Speed: A few days
Fees: Interest, annual fee, foreign transaction fees
Approvals: Credit history, credit score
What it is: A company sells any outstanding invoices or accounts receivables to a factoring company, and the company receives cash for a percentage of the total owed. This option gives you a faster cash flow rather than waiting for clients to pay their invoices.
Who it’s best for: Companies struggling with cash flow with outstanding invoices, accounts receivables, or pay applications that their clients have not yet paid
Amount: Depends on invoices
Speed: A few days
Fees: Factoring fees
Approvals: Creditworthiness of customers
What it is: A small business receives a loan from the SBA for between $500 and $5.5 million. These loans have more affordable fees and interest rates than many other financing options. However, SBA loans are some of the strictest of the funding options and require you to prove things like that you are a small business, that your company is for-profit, that you have never defaulted on a government loan.
Who it’s best for: A small business that meets all necessary criteria for an SBA loan, like that it operates in the U.S., has invested equity, and can’t get a loan from another financial entity.
Amount: Up to $5.5 million
Speed: 5 to 10 business days
Use: Working capital, refinancing business debt, buying furniture, fixtures, and supplies, start-up expenses, expansion expenses
Fees: Depends on the lender
Approvals: Must prove it is a for-profit business, that it operates in the U.S., has invested time or money, and cannot receive funding from other lenders, along with any requirements by specific lender
What it is: A company works with a financing agency to lease a piece of equipment used for their business. The monthly payments are stable, and your company can choose to either own or return the equipment once the lease expires.
Who it’s best for: Anyone who rents heavy machinery or other business equipment every month to do their job, or who needs to buy new equipment but can’t afford to pay for it outright.
Amount: Cost of equipment
Speed: A few days
Use: Pay off cost of business equipment
Fees: Lease rate factor, security deposit
Approvals: Credit history, cash flow,
What it is: With an asset-based loan, a company secures the loan with collateral like liquid assets (such as securities) or physical assets (such as accounts receivable, inventory, property, or equipment). The loan won’t cover the entire value of your assets, however. Typically, an asset-based loan covers 50% of inventory and 70% to 80% of receivables. If the company fails to pay back the loan, the lender can seize the collateral.
Who it’s best for: A business with an appropriate amount of collateral to put on the line that needs funding quickly.
Amount: Based on value of assets
Speed: A few days
Approvals: Credit history, cash flow, time doing business
What it is: An investor puts money into a company and then receives a percentage of the profits in return. The investor is also able to have a say in business decisions, but they typically don’t require things like credit checks prior to investing.
Who it’s best for: A company that is comfortable having an external entity take part of the profits and be involved in the decision-making process.
Amount: Depends on the investor
Speed: Depends on the investor
Fees: Shares in the company
Approvals: Credit, business financials
What it is: A microloan program provides small business owners loans of $50,000 or less that come in the form of a traditional term loan or a peer-to-peer loan. Some require good credit scores and others don’t, and some like the SBA have specific purposes that the money must be used for. You’ll make a monthly payment including interest.
Who it’s best for: A small business less than two years old that doesn’t need a large loan and is having a hard time getting a small loan from a traditional lender.
Amount: Up to $50,000
Speed: A few weeks or more
Use: Working capital, buying inventory, supplies, furniture, fixtures, machinery, or equipment
Approvals: Depends on the loan
Which small business financing option is best for you?
As you can see, there are multiple factors to consider when deciding which small business financing option to pursue. In addition to knowing how fast you need the money and how much money you need, you’ll need to consider things like the repayment. For example, the interest rate and monthly fees have a large impact on what type of loan you can afford to repay.
Thinking through all aspects of the many small business financing options will allow you to pick the perfect funding choice for your company.
Ready to grow your business and stabilize your cash flow?
Cultiva Financial is here to help you secure the best small business financing option for your unique situation. Check out our financial services page to learn more about business funding from Cultiva Financial or reach out with the short application below to get started!