Business financing can give your small business the boost it needs to thrive (and sometimes survive!). Unfortunately, however, multiple funding options are available, and business owners might feel overwhelmed by all of them.
Finding the appropriate business funding solution depends on a range of considerations. Here you will find an overview of eight popular funding solutions with pros and cons lists to aid your research process.
Featured Small Business Loans.
1. Online Loans
Online Loans In today’s digital era, taking out business loans doesn’t require visiting an expensive financial institution. Now, multiple nonbank lenders provide business loans online, so you can apply from home or the office!
Loan limits, repayment terms, interest rates and fees can vary widely depending on the online lender and loan type you select. With this financing source, you can cover expenses related to working capital needs, expansion costs, debt consolidation or purchasing inventory or equipment.
Online business loans may offer more lenient approval criteria than traditional bank loans. According to Federal Reserve data, 81% of business loan applicants were approved for at least some funding with online lenders before March 1, 2020; that percentage dropped to 55% after that date (while also declining among other financing sources).
Online loans provide businesses with faster access to funding if approved, but lending speed and flexibility often come at a price.
Pros and Cons of Online Loans (Industrial, Private, etc.)
Pros & Cons Qualification requirements may be less stringent Interest rates tend to be higher than traditional bank loans Fast funding turn times
Fees may be more costly compared to alternative forms of business financing
Preapproval processes may be available; however, funding costs may not be transparent or easily understandable.
2. Traditional Bank Loans
Business loans offered through traditional financial institutions like banks and credit unions remain a popular way of borrowing money, particularly with qualified borrowers, as the interest rates tend to be more reasonable compared to alternative lending sources like crowdfunding platforms and crowdfunding marketplaces.
However, qualifying for bank loans may prove challenging for certain businesses–particularly startups or those without established business credit histories. Even having poor personal credit could present obstacles when seeking this type of funding for your venture.
Pros and Cons of Bank Loans
Mes The benefits of bank loans can include lower interest rates; more lenient eligibility requirements can increase borrower satisfaction levels, with loans coming from credit unions, small banks or larger banks being most satisfying to borrow from while funding speeds may vary accordingly, and funding speeds could take longer depending upon funding speed available compared with loans offered from credit unions or large banks when funding speeds can vary considerably in speed due to lower funding speeds compared with alternative funding methods.
Does Not Qualify with Poor or No Personal Credit
3. SBA Loans
Loans guaranteed by the U.S. Small Business Administration (SBA) are a more cost-effective way to access business financing. Federal guarantees offer security that allows lenders to approve borrowers who might appear riskier investments otherwise.
Unlike bank loans, the SBA doesn’t issue loans directly; you must contact an SBA-approved lender to apply. But like traditional bank loans, qualifying for this form of business funding may involve numerous hurdles that must be passed to be considered eligible.
However, if your business can qualify, the SBA could grant up to $5 million in loans. Repayment terms can extend as far back as 30 years, and financing may require only 10% down of the loan amount.
Pros and Cons of SBA Loans Pros: Competitive interest rates
More extended loan approval and funding processes, more generous repayment terms often available and strict qualification criteria can all be disadvantages of taking out an SBA loan.
Low down payment requirements may be available; in such an instance, personal guarantees from all business owners with 20+% ownership may be necessary.
4. Business Lines of Credit
A business line of credit offers an easy, flexible way for your business to borrow funds as needed for projects or as an ongoing source of capital. If the amount necessary for each project can’t be known immediately or you require continuing capital sources, a line of credit could be worth exploring as it provides access to money quickly when needed.
Like a credit card, business lines of credit allow businesses to borrow up to their credit limit for borrowing funds. Once the borrowed funds have been paid back in full, your business may use its line again up to its limit; however, access may no longer be available to your account when your draw period ends.
Business lines of credit can be obtained from both traditional financial institutions and online lenders, and their approval criteria, interest rates, and borrowing fees may differ widely depending on which lender you approach.
Pros and Cons of Business Lines of Credit
mes mes mes mes mes offers the flexibility of borrowing multiple times against one credit line. However, interest rates may be higher than traditional bank loans when using online lenders (mainly).
Costs may add up quickly if you pay high-interest rates and fees, although their loan limit might be smaller than other funding sources’ lending amounts.
5. Business Credit Cards
Business credit cards offer another flexible solution to gaining financing and building credit for your business. Qualifying for this funding type should be more straightforward if your credit score (at least 670) is sufficient, making business credit cards a fantastic tool in helping establish business credit.
Of course, credit card interest rates can be high even for applicants with solid qualifications. According to Federal Reserve data for accounts that assessed interest, the average credit card interest rate in November 2021 for consumer cards was 14.51%; these figures may differ for business credit cards depending on factors like your personal credit rating.
Pros and Cons of Business Lines of Credit
Avoid interest by paying the entire balance before the grace period ends. It may appear on personal credit reports and possibly harm your score
Personal guarantees are typically required (though there may be exceptions)
Can help establish business credit
Don’t expect the same federal protections as consumer cards
6. Small Business Grants
Grants offer an attractive option for financing any small business. Their main attraction lies in not needing to repay or surrender part of your business equity in exchange for them; grants are, effectively, free money.
On the downside, you will likely face stiff competition when applying for small business grants. You may need to submit many detailed and laborious applications to increase your odds of selection for cash awards. Budgets are complex ways of funding businesses if you qualify, but they are a great way of providing emergency funding solutions.
Pros and Cons of Grants
There’s no obligation for your business to repay funds received as grants; however, researching grant opportunities may take considerable time and energy.
No equity needs to be offered in exchange for investments; applications and proposals may take time, and you may require professional help managing them.
Grants offer no monthly payments to factor into your business budget, yet due to their increased value, you could face fierce competition among other applicants for such appointments.
7. Invoice Factoring
Invoice Factoring Businesses providing services or products to other businesses often turn to invoice factoring as another funding solution. Under invoice factoring, a factoring company purchases your outstanding invoices and gives your business part of that money upfront in return; then, they collect payments from customers before giving back any remaining balance minus a percentage known as a factor fee.
Regarding invoice factoring financing, customer creditworthiness matters more than your business’s credit scores. Even those with bad or no established credit could qualify. However, as is often the case with alternative funding sources for small businesses, the borrowing costs may be high with invoice factoring.
Pros and Cons of Invoice Factoring
Finanzierung qualifications may be flexible Factor fees can be costly (0.5%-5% of invoice value). Access may be possible quickly. The factoring company will work directly with customers to collect invoices.
Your business could utilize the funds for various expenses, only available for invoices sent between businesses (B2B).
Crowdfunding
Crowdfunding can be an innovative method to raise cash for business goals. Numerous crowdfunding options exist, from debt repayment through reward crowdfunding or equity investment; to donation-based fundraising models.
Your crowdfunding project depends on which type you wish to use, and you should find an appropriate platform that suits your campaign management needs. Here are a few options:
Reward crowdfunding platforms like We Funder and Kickstarter allow debt and equity crowdfunding options, respectively.
Donation Crowdfunding with GoFundMe
Every type of crowdfunding offers different advantages and drawbacks; donation crowdfunding, in particular, does not require repayment or sharing your company’s equity in return for investments; however, creating awareness about and getting people on board to donate towards your goals may prove challenging.
Crowdfunding presents both advantages and disadvantages. Here are the pros and cons of crowdfunding:
Pros and Cons
Pros Financial risk levels may be low (although debt and equity crowdfunding increase this risk level); However, it can be challenging to attract donors or investors and stand out.
Funding campaigns may increase brand recognition for your brand; however, fees and expenses associated with donation-based crowdfunding might incur. Crowdfunding could provide a valuable platform to test whether or not a venture can sustain itself before investing big dollars; however, all your efforts may not pay off immediately.
Researching different types of business loans and funding options puts you in an advantageous position when seeking business capital. Review what steps must be taken to qualify for one before applying for any of them.
