As a small business owner, you will likely need to seek funding at some point. There are many options available from credit lines to invoice factoring and more. Each comes with advantages and disadvantages. You need to determine why and when you need the funding to determine which one is best for you.
In this blog, we’ll explore some of the most popular business loan options.
Top 10 Business Loan Funding Options
The first funding option we’ll explore is term loans. This option provides you with a lump sum of cash which will be re-paid with interest over a period of time. Alternative lenders can offer up to $1 million and provide funds faster than a traditional bank.
- Cash upfront
- Allows you to borrow more than other loan options
- Funding is fast with alternative lenders
- Often requires collateral or a personal guarantee
- Costs vary, alternative lenders charge higher fees than traditional lenders
The SBA does not provide the loan but provides a guarantee to lenders on a portion of the funds in case the borrower defaults. Repayment periods are determined by how you plan to use the funds:
- Working capital: 7 years
- Equipment: 10 years
- Real Estate: 25 years
- Offers lowest rates
- Can borrow up to $5 million
- Longer repayment terms
- Long, rigorous application
- Difficult qualification standards
Business Line of Credit
A business line of credit provides your business with funds up to a certain amount. You draw what you need from the line and only pay interest on the money used. As you pay down the loan, the funds become available again. This funding option offers more flexibility than others.
- Unsecured, no collateral or personal guarantee required
- Often has additional fees (maintenance and draw fees)
- Strong credit and revenue requirements
An equipment loan is a funding option that can help you cover the equipment needed to run your business. Typically, the equipment is the collateral for the loan, and the terms are matched with the life expectancy of the equipment. Rates depend on the strength of your business and the value of the equipment.
- Strong credit and business finances get competitive rates
- You own the equipment and payments build equity
- Typically requires a down payment
- Equipment may become obsolete before the term is over
Invoice factoring may be a viable funding option if you have unpaid invoices and need fast cash. This process involves selling your invoices to a factoring company that will advance you 80% to 95% of your invoices’ value and collect payment from your customers. Once the invoice is paid, you will be given the remainder of the funds, minus the company’s fees.
- Fast cash
- Easy approval
- Can be expensive
- Lose control over collections efforts
This funding option is similar to invoice factoring. However, instead of selling your invoices, you use them as collateral to secure a cash advance. You retain control of the invoices.
- Fast funding
- Customers will never know
- Expensive compared to other options
- You are responsible for collecting from customers
Merchant Cash Advance
A merchant cash advance provides your business with funds upfront to fund your business. However, instead of making monthly payments, you commit a percentage of your daily credit card sales or agree to a fixed daily/weekly withdrawal from your bank account.
- High costs
- Cash flow issues due to frequent payments
This funding option is ideal for startups since most banks won’t extend a business loan to a business with no history. Approval is based on your personal credit score/history and typically requires good credit.
- Ideal for startups
- Fast funding
- High costs
- Smaller funding amounts
- Failure to repay can damage personal credit
Business Credit Cards
A business credit card is similar to a line of credit. You can use the funds and repay as needed, as long as you don’t exceed the limit and make minimum monthly payments.
- May earn rewards on purchases
- No collateral
High-cost, rates may increase
Extra fees may apply
The final small business funding option we’ll explore is microloans. A microloan is a small loan, typically $50,000 or less. This type of funding is available to startups, new businesses, and those that are located in disadvantaged communities.
- Low costs
- Services such as training and consulting often included
- Smaller amounts
- Stringent eligibility criteria
Does Your Small Business Need Funding?
If your small business needs funding, keep these options in mind. If you want to learn more, let Dorra Financial Group help!