Identifying Sources of Financing
25
The lifeblood of any small business is its availability of financial resources. More than most people realize, not all sources of funding are equal in terms of cost, eligibility requirements, and the types of products and services offered. Therefore, it is important for business owners and entrepreneurs to understand their options when it comes to finding alternate sources of funding.
Traditional Sources of Financing
Traditional sources of financing are avenues of funding where the business owner must provide an application package, along with business and financial plans and other documents, to a lender. This can include banks, credit unions, investment firms and venture capital groups. When it comes to traditional sources of financing, these entities are looking for businesses that have been operational for at least 12 months, have a good credit history, a solid management team, and an established customer base.
Non-Traditional Sources of Financing
Non-traditional sources of financing, on the other hand, are often shorter-term or a more personalized nature. This can include family and friends, angel investors, online lenders, and government programs. These sources are more lenient with the criteria, but some may come with more stringent requirements and higher interest rates, so it is important to do your due diligence to ensure you find the right fit.
Government-Backed Finance Programs
The government provides funding support to businesses in the form of grants, tax credits, and loan guarantee programs. Each program has different eligibility requirements, so it is important to understand what is on offer before you apply.
Invoice Financing
Invoice financing is when a business that is waiting for payments from its customers can get an advance on their receivables. This type of funding requires customers whose creditworthiness is proven, but it can be a good option for businesses whose customers may be slow payers or ones who have a lot of receivables to pay out of.
Accounts Receivable Financing
Accounts receivable financing is another type of financing for businesses that have a large number of receivables. This type of funding allows businesses to get a lump sum of cash for their receivables and it can be quicker than invoice financing.
Equipment Financing
Equipment financing is a good way to acquire the necessary tools and technology to run your business, without depleting your cash reserves. This type of funding provides businesses access to the equipment they need and covers the costs over an agreed-upon financing term.
Small Business Administration Loans
The U.S. Small Business Administration (SBA) is a federal agency that offers loan guarantee programs to help businesses get the financing they need. These loans are guaranteed by the SBA, but the interest rate and conditions of the loan will depend on the loan program and the lender.
Merchant Cash Advance
A merchant cash advance is a type of loan that allows businesses to get an advance on their future credit and debit card sales. This type of funding is quick and easy to obtain, but it can be more expensive than other forms of financing, so it should be used only as a last resort.
Online Lenders
Online lenders are becoming increasingly popular for small businesses, as these lenders make the process of applying and getting approved for a loan much faster and more efficient. These businesses typically have lower interest rates than traditional lenders and often require no collateral, giving them a great option for businesses seeking quick funding.
Secured Business Loans
Secured business loans are ideal for businesses with a good credit history, but may be more expensive than other types of financing due to the security of the loan. With secured loans, the lender will require the borrower to put up some form of collateral in order to secure the loan.
Overall, small business owners have access to a variety of financing sources. It is important to weigh the pros and cons of each option and make sure you understand the eligibility requirements, terms and interest rates before applying. Additionally, it is important to choose a funding source that not only meets your needs but also fits the size and scope of your business. With the right financing, you can get the funding you need to build and grow your business.
