Financing Options for Small Businesses

Small businesses have unique needs that often stem from cash flow problems. They need to have the money to start a new project, but they haven’t been paid for the last project yet. They can’t just shut down until their money comes through, so what can they do? There are many funding solutions available, such as eCapital small business financing that can help with short-term and long-term financial issues. Here are other commonly used solutions to consider.

Bank Loans

The most obvious financing option for small businesses is a bank loan. Usually, this is how many small businesses get their start because they often don’t have the capital to get their company in a place where they can begin making money. But, loans can be a good option for short-term and long-term cash flow issues as well, as long as you have the credit rating and collateral available to put up against the loan.

With a traditional loan, you’ll often get fairly low interest rates and decent payment terms, but they can be challenging to qualify for, especially after the most recent recession, when financial institutions tightened up their requirements.

Small business loans are a type of bank loan that are specifically for companies of a certain size. They are easier to qualify for than traditional loans, but they require a lot of paperwork and can take a long time to come through. They are backed by the federal government, so banks are more willing to lend to companies with lower credit ratings than with traditional loans, but you’ll still need to meet specific requirements to get this money.

Online loans are growing in popularity for small businesses, especially those that have low or little credit. They have a simplified application process as well, which can be attractive for busy owners who don’t have time to sit down with a banker and fill out reams of paperwork. Applications can often be approved and the loan funded within 24 hours, but their interest rates are usually higher than traditional or small business loans, especially if you have poor credit.

Loans can be a good place to start looking for financing, but there are other options that might make more sense.

Invoice Factoring

Invoice factoring is a process by which you sell your outstanding invoices to a factoring company at a discount (the factoring fee). The factoring company immediately pays you an advance on the balance and then works to collect the full balance from your customers. As an example, let’s say you have an outstanding invoice for $10,000. A factoring company buys it and advances 90% of the full value, so you receive $9,000 up front as advanced payment. The remaining $1,000 is held in reserve until the invoice is paid in full. Once the invoice factoring company receives the full invoice amount, they release the reserve and transfer the balance owing of $1,000 to your business account. The factoring fee is deducted from either the advance or the reserve.

This financing option is a smart choice for small businesses that need cash fast. They can sell their invoices and get paid the same day, which can be critical for businesses that need to make payroll, pay their rent, or buy materials for the next project, whatever they need the money for. The best part is that the invoices are their collateral, so they don’t have to put up any company assets to get the money they need.

Small Business Grants

Grants are essentially free money, so if you can get a grant, take it. This money is set aside to help small businesses get established or grow and you don’t have to worry about paying it back. Nonprofits, corporations, and governments are usually behind the grants and they are extremely difficult to get. This is because everyone loves free money and the competition for these grants is high, but also, applying for grants is hard work.

Many times, companies hire outside companies to write their grant proposals for them because business owners may not have the skill set required to write a proposal that will persuade someone to give them money. So, in this case, you might have to spend some money to get a lot more money. Be aware, though: some grants require the money to be spent on specific things, so you may not be able to use this money to solve cash flow issues.

Crowdfunding

A recent type of small business financing that’s been successful for many companies is called crowdfunding. This is where you attempt to get multiple investors to give your company money to put your idea or product into action. While it sounds like a good idea and it is a good idea if you can get a lot of people interested in your company, it again takes a lot of work to get in front of the right people.

Depending on how much money you need to raise, a crowdfunding effort might be worth your time. If you need a lot of money quickly, though, it might be best to try other options.

Conclusion

If you’re struggling with cash flow for your small business, give one of these financing options a try. Just be sure to weigh the pros and cons of each one carefully to make sure the one you select is going to work for you.