Starting and growing your business requires a lot of hard work to overcome all challenges. Still, one of the biggest obstacles for small business owners that remains is funding.
Without sufficient funds, your business might have difficulties with purchasing essential equipment, expanding, and keeping up with competitors. Fortunately, there are numerous financing options available that may come in handy.
To make the best choice, we decided to explain the best financing solutions for your small business and provide all of their pros and cons!
Business Lines of Credit
A business line of credit is a revolving loan that allows you to borrow a fixed amount of capital for short-term business expenses, such as purchasing equipment. It works as a credit card, enabling you to borrow funds up to the credit limit on your account, and you can draw as much as you need. Once you repay the sum you have borrowed, you can reaccess the credit line.
By choosing this financing option, you can borrow funds more times from the same credit line and pay interest only on the amount you have used.
In contrast, the interest rates may be higher than those of traditional bank loans, costs can add up quickly, and the credit limit on the business line might be lower than the loan amount from other funding options.
Business lines of credit are suitable if you aren’t sure about the amount of money you will need or if you simply need standing capital. You can get a business line of credit from both traditional and online lenders. But, the approval criteria, interest rates, and fees might vary depending on the lender. Click here to find some of the best lenders of business lines of credit.
Traditional loans allow you to borrow money that you will need to repay within an agreed repayment schedule. You can apply for such a loan at a bank or at a credit union. However, there are a few pros and cons you need to consider.
They are a good option for well-qualified borrowers. So, they come with more affordable interest rates if you have a good credit score. However, small businesses may find it more challenging to qualify as they don’t have established credit. Moreover, if you have a bad personal credit score, it may affect the approval. But if you manage to secure a loan, it can be helpful for building your future business credit score.
Compared to bank loans, online loans allow you to apply for them from the comfort of your home or office. This type of funding is most suitable for covering different expenses, such as business expansion costs, purchasing equipment, and debt consolidation.
You may be approved for an online loan easier, as there are more lenient requirements, but the interest rates are higher than those of bank loans, and there are higher fees. However, funding time is faster, and some lenders even provide a preapproval process.
Keep in mind that the loan limit, interest rates, repayment terms, and fees vary and depend on the online lender and the type of loan.
SBA loans are small-business loans that the Small Business Administration in the USA approves for businesses that can’t qualify for a traditional loan. However, the SBA works with licensed lenders to offer loans with favorable requirements rather than lending money directly to business owners.
SBA loans come with competitive interest rates and more extended repayment periods. However, the application process and the loan approval may still take time. Also, there are still some strict criteria; you must be in business for at least two years and have a good credit score. What’s more, some lenders may require you to guarantee to repay the loan with a 20% ownership stake.
Crowdfunding is raising funds for your business by attracting donators or investors through an online platform. There are different types of crowdfunding, such as debt, equity, reward, and donation-based. They can help you make a social impact with your project and easily develop products and services in the future.
Crowdfunding usually has low financial risk, especially donation-based crowdfunding. However, debt and equity crowdfunding campaigns come with higher risks. Moreover, attracting people can be a bit difficult if you don’t stand out from the crowd. However, if your crowdfunding succeeds, you will create brand awareness. Unfortunately, there is no guarantee that your campaign will be successful.
To ensure you’ll reach more people, you should start your crowdfunding campaign on a platform like GoFundMe, Wefunder, Kiva, or Kickstarter.
Small Business Grants
Small business grants refer to money that federal, state, county or local governments, or private businesses or corporations give to your small business. They do not require you to repay them nor give up a part of your business to secure the funds.
Unfortunately, there is also a negative side to small business grants. Applying for them can be a long and challenging process. You often need to research all potential opportunities, complete long proposals and application forms, or even hire someone to help you. Also, as these grants are basically free money, there is a huge competition for them, and there is no guarantee you’ll receive a grant.
Small business grants are most suitable if you want to develop an innovation that will boost your business growth.
Business Credit Cards
Business credit cards are intended for business use rather than personal one. This type of funding is easier to qualify for if you have a good credit score. However, there are both pros and cons.
If you manage to pay the entire statement balance before the grace period ends, you can avoid paying interest rates. Therefore, you can build a better credit score. However, you become personally liable when you apply for a business credit card, which means your credit score may suffer if you don’t repay the amount on time, or you can lose whatever you put as collateral. Also, you don’t get the same federal protections as personal credit cards, which can make your business vulnerable to fraud.
This type of business funding is best for smaller expenses that need to be paid in a short time or for managing the cash flow of the small business.
Nowadays, there are many small business funding options that can assist your business. But to find what suits you the most at the moment, you need to understand and carefully take into consideration each advantage and disadvantage we’ve provided above. Then, you will be aware of what you are getting into and the consequences!