Money is always at a premium for small business owners. Between cash flow issues, new opportunities, repairs, or just starting out, there almost always seems to be an emergency or a reason to need more cash. Fortunately, there are options available at any stage of the business life cycle.
Two Financing Options for Startups
One of the biggest barriers between startups or young businesses and financing is the time in business requirement. With less than two years in business, it can be very difficult to qualify for a loan or other traditional financing options.
With the emergence and growth in popularity of platforms such as KickStarter and GoFundMe, crowdfunding has become a popular and viable option for startups to get their operations off the ground. Most types of crowdfunding don’t require you to pay back a loan, allowing your business to get running with that much less debt.
For those who need a small amount of funding, a popular option is a microloan from Kiva. A non-profit, Kiva allows startups and young businesses to access interest-free financing. That’s right; the interest rate is 0%. Kiva’s platform uses debt-based crowdfunding. After the application is approved, lenders can contribute in increments of $25 or more.
You will have to be able to successfully market your business or idea to the crowd in order to have a successful crowdfunding campaign. But if you succeed, it can be a boon to your fledgling business.
2. Business credit card
While most business owners think of credit cards as a safe and convenient way to pay for purchases, they can also be a flexible form of funding. If you qualify for a card with a low interest rate—or even a no interest balance transfer—you’ll have access to an affordable line of credit.
Most small business credit cards are available to start-ups. Issuers typically will review the owner’s personal credit scores and qualify applicants based on income from all sources—not just the business.
Many business credit cards offer perks such as cash back or travel points. Even without these rewards, however, a business credit card provides a benefit that will help your business in the long run: building business credit. Make your payments on time and keep a low balance, and your business credit card can help you build a strong business credit profile, which can be a major help to your business.
Two Financing Options for 2-5 Years in Business
1. Invoice financing
Invoice financing, also called “receivables financing,” lets you get money from outstanding invoices that are owed to you by customers. This can be a useful, fast way to free up cash flow.
There are two options here: factoring or discounting. With factoring, you sell your outstanding invoices to a lender, who will immediately pays you a percentage (typically 70% to 85%) of what those invoices are worth. You receive the rest of the balance—minus a factoring fee—once your client pays the invoice. The lender, not you, handles collecting on the invoice.
That last point makes some people nervous because they fear it reflects poorly on their business if customers are aware of the arrangement. You can get around this by using invoice discounting. In this case, a lender advances you a percentage of your invoice but you collect the money from your clients. After your invoice is paid, you repay the lender, minus fees and/or interest.
2. Online term loans
If your business has been established for over a year and you don’t qualify for a bank loan or need money fast, then it’s worth checking out online or “alternative loans.”
It’s no secret that small business lending has dried up at big banks over the past ten years. This is partly due to banks tightening their underwriting requirements due to rising compliance costs. Fortunately, many online lenders have stepped into fill the gap.
Term loans from online lenders work the same way as from a bank. You get a lump sum of money that you pay back, with interest, over a fixed period of time. These loans are good choices for predictable investments in your business that will assist you with long-term growth.
These days, you’ll find a variety of online term loan lenders. The amount you qualify for and the cost will vary greatly, depending on your personal credit and business qualifications. You can typically get the funds deposited into your bank account within days of applying if you get approved.
Keep in mind that costs on these loans can sometimes be very high and may not be stated as an Annual Percentage Rate (APR). You can use a free online small business loan calculator to translate the cost to an APR so you understand what you’ll pay and compare offers.
2 Financing Options for 5+ Years in Business
1. SBA loan
The U.S. Small Business Administration (SBA) doesn’t lend money directly. It partners with business lenders and banks to spur small business lending by providing guarantees to those lenders. Doing so reduces the lender’s risk.
The most popular SBA loan, the 7(a), is one of most affordable ways to finance your business. These loans typically come with low rates and flexible repayment terms. The operate the same way as term loans mentioned above, except with one caveat: it can difficult to qualify for an SBA loan.
As part of its pre-screening process, the bank will usually check your FICO SBSS business credit score, which factors in both your personal and business credit history. Most lenders will want to see an SBSS score of 150 or higher before proceeding with the loan process.
2. Bank line of credit
Similar to a business credit card, a line of credit allows you to borrow up to a pre-set limit and only pay interest on the money you borrow. More established businesses can typically qualify for a line over $50,000.
As you pay it back, those funds become available to you again. Getting a line of credit in place is wise move because it lets you ride out cash flow bumps or take advantage of growth opportunities.
Most banks require that you have a few years of business history and consistent revenue in order to qualify for line of credit. Online lenders may have looser underwriting requirements, but are also more likely to charge higher interest rates. So, if you can qualify a bank line of credit, it should be your first choice.
If you have an existing business banking relationship—and you like it—check with them first and then get a couple of other quotes.
Credit expert Gerri Detweiler is education director for Nav, which provides business owners with simple tools to build strong business credit and financially healthy companies. She’s been interviewed in more than 3000 news stories and answered over 10,000 credit questions online. Her articles have been widely syndicated, and she is the author or coauthor of five books, including Finance Your Own Business: Get on the Financing Fast Track.