Top 7 Ways To Get Business Financing
Business financing is essentially the money you need to help run your business. Without adequate funding, you may have a hard time growing your business. Investing in inventory or facilities, staffing up to establish a solid presence or covering your daily expenses. Getting business financing is a major hurdle facing many business owners. It is nonetheless one of the most important parts of starting and running a business. While paying upfront costs and covering cash flow gaps by using your own cash reserves, may seem like a technically viable financing option, it would, however, make a whole lot more sense if you made use of outside business financing. There are several ways to get business financing and the more prepared you are the better. Below is a rundown of the top 10 common ways to get business financing and how they compare.
1. Business Line Of Credit
A business line of credit is an available cash offering by a lender up to a specified amount which is always available for an undetermined period of time. It guarantees you a continuous withdrawal of credit up to a specified amount that can be used for virtually any purpose. It’s highly flexible and allows you to pay down your balance, thus opening up available credit that you can withdraw from as needed.
Newer businesses, however, may have a hard time qualifying for a business line of credit. This is because most lenders would request to see at least one year of operating history or a certain amount of annual revenue before they’ll approve your application. It is important to know that this can be a great option because payback is typically done on a weekly or monthly basis and the cost of the money is usually less expensive than a working capital loan. Plus once the line is established a client will no longer have to reapply for the line each time they need money. They just go to the website portal, approve more funds and the money is deposited into the account.
2. Invoice Factoring
Invoice factoring, also known as accounts receivables financing or invoice financing, is another type of asset-based business financing which involves borrowing against the value of your outstanding invoices. With this type of business financing option, you will be able to properly manage cash flow issues in your day to day business operations. The funding process is usually fast and your business doesn’t need to have perfect credit or a long operating history in order to qualify. This type of financing works well and is done for business to business and business to government invoices. Once the customer is approved for a factoring line, an invoice is submitted to be factored. If the invoice is approved, an account will be set up between the customer and the invoiced company and the factor company. The factor company will issue funds of 85-90% of the invoice amount to the customer right away and the invoiced company pays the factor company in the terms provided on the invoice. Once the funds are received by the factor company, they issue the remaining funds, minus the fees and interest back to the customer.
3. Small Business Loans (Working capital loans)
Small business loans or working capital loans is the solution to help finance the day to day operations of your business. They can be secured through alternative lending institutions and usually involve a speedy and simple process, unlike traditional bank loans. Typically there is no collateral, no application fees, no personal guarantees, and bad credit is not a major factor. It is also easy to qualify for a small business loan, it only requires minimal paperwork, and you can use the loan for just about any purpose. Most use it to take care of ongoing cash flow issues, take advantage of large inventory purchases, hire more employees, take on jobs with larger potential for profit, etc.
4. Equipment Business Financing
Equipment financing is an asset based loan that relies on the value of the asset, which acts as collateral, to determine whether you qualify for a loan. Assets include those things your business owns, it could be a vehicle, a piece of machinery, an equipment or a selection of inventory. It is a good business financing option for business owners who cannot afford the price tag of an equipment but are confident that the expected revenue from the use of the said equipment would outweigh the interest payments on it. With this option, you automatically become the owner of the equipment after the loan payments end. Asset-based lenders are usually more interested in the value of the asset you provide as collateral against your loan so that in the event you’re unable to pay back your loan, the lender will seize the collateral and liquidate the asset to recoup their losses.
5. Merchant Cash Advance
A merchant cash advance is another way to get business financing. This option involves borrowing against the value of your future credit and debit card receipts and as the receipts come in, you repay a percentage of them to the merchant cash advance provider. It is one of the fastest and most convenient options if your business has a steady volume of credit and debit card sales. You also stand a good chance of getting your application approved if you’re a new business just starting out or with a lower credit score.
Providers of merchant cash advance are usually more concerned about your sales and not your operating history or credit. They also charge what is called a factor rate instead of an interest rate, which in most cases can be costly depending on the percentage of your daily card sales and how long it takes for you to pay back the advance. The reason it is more expensive is because these loans are typically higher risk as they rely on future income to support the initial financing. This method should be used carefully and for short-term purposes. Typically, clients will use this to make improvements to a store front or inside remodel of a restaurant, construction financing to pay for supplies that normally wouldn’t be able to afford to grow the business. These clients also use this financing to buy equipment like a new industrial lift for a sign business or kitchen equipment to improve sales. Basically short term financing to improve sales revenue and maintain a health bank account.
Another great way to get business financing is through crowdfunding. This involves having a large number of people contribute small amounts of startup capital to help turn your business ideas into reality. Usually, you raise donations through a time limited campaign for a specific project that has a target and a clear outcome on a dedicated crowdfunding platform. One reputable platform where you can make your pitch is Kickstarter. Here you can request funding for your business and in return, you will pay a 5% commission fee plus you may have to give free product or whatever you choose to attract your investors. Kickstarter does not let you give money. However there are other sites may let you share a portion of your income for up to 10 years. The key is that it is usually an all or nothing deal and sometimes it is hard to attract enough people unless your idea is really cool and innovative. No really a good option for established businesses with a fast need for cash as this may take a considerable amount of time to reach the goal required.
7. 401k Loans And Rolling Over Tax Deferred Savings
Business owners can take advantage of tax-deferred retirement savings and use it for startup investments such as buying a franchise, building a storefront, or purchasing equipment without facing the penalties that come with early withdrawals. Financial institutions can make this possible for you by establishing a corporation for your business and a 401(k) account, then rolling over your existing retirement assets into the account, thus making the 401(k) a shareholder of the business. It usually takes a month to get setup, and you don’t have to pay any interests on it. However, note that with this business financing option you risk convenience of access to your retirement savings and loss of your account. Be careful and consult your tax accountant and/or attorney before making this change to your business model. If you are going from a sole-proprietor to a corporation, you may have to take a salary from the business and pay additional taxes based on your new filing status. In California, there is an $800 min tax for a corporation which is due every year regardless of your financial health of the business. A sole-proprietor is not subject to this tax but may be at hire liability personally for the business. Best to consult a professional before making a decision.
Confirm Capital can help you navigate the options that best suit your company. If you are interested in a free consultation, please give us a call at 888-842-4934 or you can email us at email@example.com to set up a time that works well for you.