You've got big growth plans for 2019. Maybe this is the year you've resolved to land that big account, open a new location or expand your business horizons. Putting those plans into action requires financing.
With that in mind, here are some of the top forms of business financing that can help make your resolutions a reality.
Bank loans are a mainstay of small business finance. Banks like to lend larger sums and you'll typically have a fixed interest rate and multiyear timeframe to pay it back. These term loans can be used to finance major capital expenditures, such as building a new plant, renovating an existing space or upgrading equipment. You'll need to have good personal credit an operating history for your business, and collateral. It helps to have an existing relationship with a bank, such as a business or personal account. Only about a quarter of loan small business loan applications (those under $5 million) are approved by big banks; you might have better luck with a smaller bank, where approval rates hover around 50 percent, according to the Biz2Credit Small Business Lending Index.
If you're not in a rush and you have stellar credit (in addition to a track record), you might want to apply for a Small Business Administration loan. These business loans are up to $5 million and are made by banks, not the SBA. But the government agency guarantees a large portion of each loan in the case of a default, mitigating risk for the bank. Thanks to the backing of Uncle Sam, SBA loans have the some of the most attractive rates you can find. But, this being the government, there's also red tape, and the approval process can take up to three months.
Every business needs a reserve fund it can dip into when needed, whether to pay for unexpected expenses or to pounce on a business opportunity.
There is no shortage of lenders willing to extend short-term business loans to cash-hungry businesses, even those without great credit. These short-term lenders typically operate online and deploy technology to speed up the process and assess a business's risk using criteria beyond credit scores, such as cash flow. The entire process can take a matter of minutes. But the convenience comes at a cost: interest rates can exceed 50%. The gamble is that you can pay it off in a few months and generate profits that outweigh the costs—for example, buying inventory ahead of a busy season. But caveat emptor: it's critical to read the fine print.
When it comes to funding, there's a new kid on the block: investment crowdfunding. Thanks to the Jumpstart Our Business Startups (JOBS Act), which went into full effect in 2016, small businesses and startups can raise up to $1.07 million in capital from the public via online crowdfunding portals.
The process works much like the rewards-based crowdfunding found on non-investment sites. But instead a receiving T-shirt or a product, individuals can invest. A big benefit: as a business owner, you set the terms of the investment. For example, you can offer equity shares without voting rights if you are worried about losing control, or a loan that is paid back as a percentage of revenue rather than a fixed rate, so that your payments better match the ups and downs of your business cycle.
Investment crowdfunding may be a good option for startups that have strong consumer appeal, such as a microbrewery, or established businesses with a loyal following, such as a food truck looking to open a storefront. But it takes a lot of upfront planning and is perhaps the most time-consuming funding option. The Financial Industry Regulatory Authority maintains a list of approved portals that it regulates.
Line of Credit
Every business needs a reserve fund it can dip into when needed, whether to pay for unexpected expenses or to pounce on a business opportunity. Otherwise when these situations arise, a business owner will have to scramble to secure funding, often under less than desirable terms. That's why a line of credit or a business credit card may be essential for every business. These reserve funds also help smooth out the inevitable dips and lulls in cash flow and provide a float period of up to 30 days.
Lines of credit are available through financial institutions, including banks. But the most accessible form is the business credit card. Some credit cards may have high interest rates, which kick in if you carry a balance. But they offer distinct benefits. Business credit cards can help manage expenses, for example, by automating recurring payments and tracking spending categories. Your business spending may also earn you rewards.
Accounts Receivable Financing
One of the realities of being a small fry on the business food chain is that you are often subject to payment terms dictated by larger companies. In an effort to improve their own cash flow, many big corporations have lengthened the time it takes them to pay their suppliers, for example, to 60 or even 90 days. That can leave suppliers on the receiving end scraping to make ends meet. But those accounts receivable have value, and there is a whole industry that is willing to provide cash up front for them. The practice is called factoring, where you are selling your accounts receivable at a discount to a third party, or factor. The discount rate depends upon the risk and length of time involved. In addition to the discount, there is typically a service fee.
Buying new computers or equipment? There are loans specifically tailored for that. These asset-backed loans are not all that different from a car dealer willing to extend a loan to purchase a new car. Rather than assessing your credit score and business history, asset-backed lenders are more interested in the collateral. They make a loan knowing that, if you fail to pay, they can seize back the equipment and recoup their losses by selling it.
So don't let money get in the way of your plans. No matter what your resolutions for the year ahead, there is financing that is right for you.
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