4 Great Financing Alternatives for Small Businesses
The small business financing marketplace is changing. Years ago, the only financing options were conventional loans obtained through banks, but today small businesses have multiple options from many different types of lenders. To help you sort through some of your choices, here are four different types of lending, with pros and cons for each:
1. SBA Loans
Loans backed by the Small Business Administration are a great way for small businesses to compete with larger organizations, but it can take months to qualify. Technically, the SBA does not actually issue the loan, but acts more like a guarantor. The SBA does have an Express Loan program, which minimizes the time it takes, but it is hard to qualify for one. You will need a high credit score, over 700, and collateral, as well as a profitable business. However, overall the SBA loan program is one of the best financing options for small businesses when you have time to go that route.
2. Business Credit Cards or Lines of Credit
For quick cash, business credit cards or lines of credit can be a good option. With credit cards, you can earn rewards and get good interest rate promotions at the start of the card, but you can get in trouble when you carry a balance. Interest adds up quickly. Business credit cards do not fall under the “Credit Card Responsibility and Disclosure Act” and you can have your limit reduced without any notice from the issuer if you fall behind.
3. Invoice or Purchase Order Factoring
Factoring has become a very popular way to get an influx of working capital based on your invoices or purchase orders. Modern lenders are finding solutions in order to update factoring to make it even quicker and easier for businesses. You can generally apply and get approved in under a week. These types of financing can be beneficial if you’re trying to close a cash flow gap, but can become more expensive over time. If the lender works on a recourse basis, you may be liable if your customer does not pay.
4. Equipment Leasing and Financing
Leasing equipment is another proactive way to stay up-to-date with technology in your industry without having a huge outlay of working capital to get the equipment you need. Generally, with an equipment lease, you do not need the same type of financial documents as you would for a conventional loan, but your small business may need to show that you have been in business for a while and have the minimum credit score.
Questions to Ask When Making a Decision
Before you decide which route to take, you may need to think about the answers to these questions:
- What are your business and personal credit scores?
- How quickly do you need the money for your business?
- How long has your business been in operation?
Your small business is unique, and you should balance your own financing needs against your objectives and the lender’s qualification process. Get as much information as you can before you sign contracts for financing. When you make good decisions, your business can thrive.