Small business loans are the most reliable funding options for now, as other alternatives quickly run to irreversible faults, leading entrepreneurs to return where they had started.
However, there are specific financial options that fit the state of your small businesses, more than other options. To find this out, you have to examine the matching of your business against certain standards and make appropriate inferences. While this might be too scientific for this cause, allow me to highlight the most relevant financial options and the corresponding state it can ably juice up your business.
1. Invoice Financing
Invoices are financial documents with monetary values and you are able to sell such documents to a lender, in which case the lender funds you and collects the debts from your debtors later. This option is useful for small businesses that are already in motion, have valuable invoices and as well as reliable customers.
You can have your entire invoice liquidated for you but you can only get up to 80% instantly as the remaining 20% is often withheld until you have paid the financial institution back. Since startup businesses will obviously have no invoices to offer so there’s no need for them to seek this method.
2. Business Line of Credits
This is simply what a credit card works for. With a business line of credit, you enjoy several benefits such as being able to extend the maximum amount you can borrow, and as well remaining free of interest payment for the period you are not actively withdrawing with the credit card.
This payment option works best for entrepreneurs with a high credit score (both personal and business) around 700 and above.
Not to mean low credit scores are not allowed here, but the criteria would be a little stricter for them, such as a lower maximum withdrawal and higher interest rates.
So for businesses with a low credit score, it would be more helpful to look towards other alternatives.
3. SBA Loans
This is a Government-backed funding method to relieve the cash strain on both lender and borrowers in the US.
With this, SBA lenders are able to maintain low interest rates (around 7.75%) for clients who are not eligible for traditional loans for the long term. This method has a relatively long term of processing and sometimes requires collateral.
This means it wouldn’t be useful for entrepreneurs in need of instant funding to cover for a momentary lack and for small businesses that do not have a collateral to offer.
4. Business Term Loans
This funding option is similar to traditional bank lending, with its high-interest rate and about $500,000 maximum receivable amount, however, its repayment term is also extended. This method works best for entrepreneurs interested in long term small business loans and it has a fixed payment structure so you have a clear idea of how much you are paying per month.
5. Short Term Business Loans
This is perfect for taking care of sudden unexpected expenses, it’s in direct contracts with the previously described method as its due to be paid back in about a year and a half (18 months) and the maximum receivable amount is limited to $250, 000, however, its benefit lies in the lower interest rates.
It is a perfect method for entrepreneurs who’s the previous fundraising was close to but not enough. So if your business would be in need long term financing, look away from this option.
6. Merchant Cash Advance
In a sense, this not a loan but a deal where an authorized financial institution funds your business while you pay up a percentage of your credit and debit card sales to them in the future. This method requires you to pay up some amount at the close of each business day, so in essence, it’s not meant for businesses with low cash flow or startup businesses.
7. Vendor Financing
This method assists your business in two ways, serving you funds and improving your business credit score.
All you have to do is to be in contract with vendors that report to your financing institution. This way you’d get a better credit score and secure the ease of future credit purchase. You’d also need to get a net 30 account with such vendor, this account allows you to buy a product now and pay in 30 days. The method is good for businesses that are not making a lot of money yet, not fresh startup business as this could backfire if the expected income is not being made within 30 days.
In conclusion
The most appropriate financing option for your business can scarcely go outside of the scope of what has been discussed above, however, I’d advise you make further research for the sake of clarity.
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