Business Financing: How to Get Capital to Grow Your Business
When it comes to business financing, there are numerous ways to fund your business. Find out which one is the best funding model to grow your company.
Starting and running a business takes a lot of hard work and dedication. According to research, over 60 % of businesses face financial challenges, with the biggest challenge being cash flow. Even with the best planning and execution, there may come a time when you need some extra financial help to keep your business growing.
That's where business financing comes in. In this article, we will discuss the different types of funding available to small businesses. So whether you're just starting out or you're looking for ways to expand your business, read on for helpful tips on business financing.
Most business owners think of bank loans first. These traditional loans can be an excellent option for the right type of business, but your choice will depend on how much money you need and what you plan to do with it. That's because banks offer different sizes and types of loans depending on whether they consider them short-term or long-term, secured or unsecured.
Short-term loans are for a specific purpose and have a defined repayment schedule. The bank will want to know what you plan to do with the money and how you will repay it. Long-term loans are not tied to any particular use of the funds, but they typically come with a higher interest rate. The bank wants to be sure you can afford the payments.
There are also unsecured loans, which don't require any collateral but come with a higher interest rate and may be harder to get. You'll also want to consider your credit history and business plan when applying for bank loans.
However, bank loans have their limitations. They are strict about business funding, and loans can take a long time to get approved. You also need a good credit score and a business plan to get approved.
As a result, business owners fail to get the business financing they need.
The Small Business Administration (SBA) offers government-backed loans to small businesses with favorable terms and interest rates. But, unlike the SBA's other loan programs, these loans are not made directly by the federal agency. Instead, they are essentially backed or guaranteed by the SBA for a portion of their value—usually up to 85%.
This means that if the borrower defaults, then the SBA will pay out that amount. If you qualify and are approved for such a loan, it may have an interest rate as low as just over seven percent. The SBA also offers other financial assistance programs for small businesses, including grants and tax breaks.
However, SBA loans might not be your best business financing option. There are several limitations to these business loans.
To begin with, it can take 90 days or more to get the business funding you need, which could put your business at risk of failure during this time.
There's also a lot of paperwork involved, and you will need to meet stringent eligibility requirements to qualify.
Business Line of Credit
A business line of credit is a loan that a bank extends to a company up to a certain limit. The company can borrow against the line of credit as needed and then pay back the money over time. This type of business financing is ideal for businesses that have predictable cash flows, such as those in the retail or service industries.
To be successful in this type of business, you must be able to predict your cash flow. If you can accurately forecast your sales for each month (or week), then you can create a cash flow projection that shows how much money will be available, when and how it'll be used.
A business line of credit is not appropriate for businesses with unpredictable cash flows, such as those in the manufacturing or construction industries, where sales are often made on credit terms.
The main advantage of business line of credit financing is that you have access to business funds quickly. You won't need all the paperwork associated with traditional bank loans. In fact, business owners can get business funding within 24 hours, allowing you to keep your business running smoothly.
Invoice factoring is a type of business financing that allows companies to borrow against their outstanding invoices. This can be an excellent alternative to traditional business loans because it provides cash flow when you need it. However, unlike a loan, the funds are not paid back with interest.
Instead, invoice factoring is repaid through sales revenue, so the more invoices you can factor in, the more money you can borrow. There are two types of invoice factoring: recourse and nonrecourse. With recourse factoring, the factor (the company that provides the financing) has the right to collect any unpaid invoices from the customer if the business defaults on its payments.
Non-recourse factoring is considered to be less risky because it does not require collateral such as assets or real estate. The downside is that nonrecourse factoring can be more expensive, and it usually requires a longer time to fund.
A business bridge loan is a short-term business financing option that business owners use for cash flow issues. The business owner takes out this business loan to get over an unexpected cash hurdle.
Suppose there are major events within a business, such as a business downturn or business expansion. Then, business owners may find themselves in need of temporary business financing.
But a business bridge loan is not an ongoing business loan. It's only necessary when there's a critical period between your business income and your spending.
You can get such loans quickly through alternative business finance companies.
Getting Business Financing for Your Company
When business financing is what you need, it's important to think about your business plan and business funding options early on. There are many different business financing sources available, but not all of them will be the best choice for your business.
Riverpoint Capital is an alternative way to get business funding. Clients have a dedicated representative they speak with to guide them through the process, get funding quickly, and make it hassle-free.
If you currently need business funding, please get in touch with us and we’ll discuss how we can help you.