Small Business Loans vs Small Business Funding
Typically, when you think about how to secure capital for your business, small business loans are the first option that comes to mind. Small business loans, particularly SBA loans are the most familiar financing vehicle. Still, there is also small business funding to consider. Wondering which strategy is better for your small business? Read on to find out.
Small Business Loans
Even with good cash flow management, there are times when you need extra capital. You may want to upgrade your equipment or jump on an opportunity to purchase a new facility. If you’re running a startup, you’ll likely need a small business loan unless you have the cash to cover costs.
A small business loan is a form of debt. You apply for financing and if approved, receive the funds to be repaid with interest. Many factors influence your loan terms: the lender, your business history, business, and personal credit scores, balance sheet, financial projections, and your business plan.
Types Of Small Business Loans
- SBA loans: SBA-guaranteed loans are processed by approved lenders. Loans from $25,000 to $5.5 million are available to cover startup costs, operating capital, and investments in your business
- Installment loans: This typical bank loan offering requires an excellent credit score, healthy cash-flow, and a well-written business plan. Installment loans offer affordable interest rates and manageable monthly payments
- Line of credit: A secured or unsecured business line of credit affords continuous access to capital. You withdraw the amount you need and repay with interest through scheduled payments
- Online loans: These short-term loans are smaller than traditional bank loans, with repayment terms of 12 to 84 months. The application process is straightforward and funds are generally distributed within hours of approval
- Microloans: Smaller loans, typically around $50,000, can be obtained from non-profit organizations which are perfect for startups and sole proprietors
- Commercial real estate loans: A commercial real estate loan can be used to upgrade current facilities or construct a new facility. These are long-term loans with affordable monthly payments
- Equipment loans: You can access equipment loans from online lenders, credit unions, and banks. The equipment serves as collateral for financing
- Business credit cards: A business credit card is also a type of loan. The lender sets your credit limit and you use the card to cover your expenses. Interest is applied only to what is charged
Small Business Funding
It may be impossible for you to obtain a loan from a bank or other lending institution. You might be a startup, lack excellent credit, or exhibit cash flow that can’t handle debt payments. If you are a high-risk borrower, your interest rate could result in a debt that you carry for years. Fortunately, there are other ways to raise capital without taking out a small business loan. Here are a few ideas.
Types Of Small Business Funding
- Small business grants: You don’t have to pay back grants. Grant funds can be used for any purpose if you stay within the grantor guidelines. There are grants for minority-owned, women-owned, and veteran-owned businesses among many others. Learn more about federal grants by visiting grants.gov
- Equity financing: This type of funding involves investors. There’s no loan to repay, but the investor receives a share in your small business. Angel investors are great for startups whereas many venture capitalists look to invest in more established businesses in trending industries
- Crowdfunding: Introduce your business mission on a crowdfunding platform. Solicit small business funding in exchange for rewards or shares in your business
- Merchant cash advance: When you urgently need cash quickly to cover a short-term cash flow gap, a merchant cash advance can be a good option. The merchant lender advances you a certain sum of money in return for a percentage of your future credit card sales. Repayments are made daily from your bank account
- Invoice financing: If your cash flow problem is due to late-paying customers, invoice financing can help you cover the gap. Invoice financing companies provide an advance, usually around 80% of the total of your outstanding invoices. You repay the advance as soon as the unpaid invoices are paid. You are responsible for closing the accounts
- Invoice factoring: This works like invoice financing, but you turn over your accounts receivables to the invoice factoring company. They are responsible for collecting from your customers
Which Is Better?
Deciding which financing option is more suitable for your small business depends on how quickly you need the funds, how much capital is required, how you intend to use funds, and your business history.
SBA and bank loans offer the most substantial infusion of capital. If your cash flow can handle debt financing, then an SBA or traditional loan may be a better long-term solution for business growth.
If you need startup money, small business funding such as grants and equity financing might be the best option. Accordingly, there would be no debt to burden your cash flow. Moreover, you would have the financial freedom to invest all revenue into growing your business.
Whether you are a startup or an established small business, you need capital to achieve your business aims. Small business loans are the most common way to access capital. Still, loans aren’t your only choice.
There are other ways to obtain business funding. Consider all your options before choosing a small business financing strategy.