How to Select the Best Business Funding Solution in 8 Steps
8 Factors to Consider When Evaluating Business Funding Types:
As a business owner, it’s crucial that you have enough working capital on-hand to run your business. Ample cash flow is needed to afford costs such as:
- Operational expenses
- Marketing costs
Of course, every business is different, and financing needs vary depending on your industry, size, and other factors. Before you shop around for business funding solutions, be sure to take the following steps:
1. Consider the Stage of Your Business
If you’re a new business owner, you may have different needs than a business that’s been around for years. You might need to borrow more money to cover startup costs and initial expenses like commercial property, marketing, and insurance. Therefore, you may be better off with a term loan, as it can provide you with hundreds of thousands of dollars.
In addition, keep in mind that the best business funding sources for your company will change as you grow your business. For example, you might not need a large business loan to start, but you could require it later to afford an expansion project or expensive inventory.
2. Determine If Your Credit Score Meets Eligibility Standards
Before approving you for a loan amount, business lenders will look at your credit score. If you have a good credit score, they’ll be more confident in your ability to repay a loan. In addition, the better your credit score is, the more financing options you’ll have at your disposal.
If you have good credit, you can get approved for term loans and SBA loans that offer favorable interest rates and terms. On the flip side, if you have bad credit, you might have to settle for a secured loan, such as equipment financing or invoice factoring.
3. Determine How Quickly You Need Funding
Some business funding sources are faster to receive than others. If you need capital right away, your options may be more limited than if you can wait weeks or even months.
Note that you’re more likely to get approved for grants that you don’t have to pay back or loans with low interest rates and favorable terms if you take the time to go through a rigorous application process.
4. Evaluate Your Business’s Current Finances
It’s important to explore your current financial situation to determine how much you really need to borrow.
If you have sufficient cash flow, you may not need to borrow as much as a business with cash flow shortages.
In addition, if your cash flow tends to be consistent, you may feel comfortable borrowing more money than a business with unpredictable cash flow. To determine your current finances, look at financial statements like balance sheets and income statements.
5. Estimate Your Projected Finances
Projected finances are especially important if you own a startup or newer business.
By evaluating your projections, you’ll understand what type of monthly payments you can afford. Of course, there’s no way to determine exactly how much revenue you’ll generate, so it’s a good idea to be conservative. You can always borrow more money if you exceed your revenue goals.
Although you can project your own finances, it’s a good idea to ask a CPA or financial planner for help. With their professional assistance, you can be confident in your projections prior to submitting a loan application.
6. Research Business Grant Options
Business grants are offered by government agencies, state organizations, and private companies. If you get approved for a business grant, you won’t be required to pay it back. Therefore, business grants are an ideal type of funding.
Prior to applying for grants, conduct research to find out which grants may be available to you. Then, apply for them and wait to see whether you get approved.
If you receive one large or multiple small grants, you may find that you don’t need to take out as many loans that you’ll need to repay. However, it’s important to note that grants can be difficult to qualify for, and competition will be stiff.
In addition, although you won’t need to repay a grant, you may be required to use the funds for designated expenses. With most business loan programs, you’ll have the freedom to spend your loan however you choose.
7. Consider Meeting with Investors
Investors provide you with funds in exchange for ownership of part of your business.
So, how do you find investors for your small business? Consider crowdfunding platforms like Kickstarter or Indiegogo. By creating a crowdfunding campaign, you can ask for donations from interested patrons. In exchange, you might provide them with a gift.
In addition, you can attend business meetings and networking events, share your ideas, and connect with potential investors.
Social media, blogging, and applying to startup accelerator programs are also good ways to get your business noticed.
8. Weigh Your Business Funding Options
There’s no shortage of loans available to small business owners, making them a great small business funding source. You can choose from funding options, such as:
- Loans from Alternative Lenders
- Bank Loans
- SBA loans
- Business Credit Lines
- Credit Cards
- Invoice Financing
- Bridge Loans
- Equipment Financing
Research the various loans out there and determine which ones you may qualify for. SBA loans, for example, have more rigorous requirements than short-term loans like merchant cash advances and invoice factoring.
Conclusion: The Best Business Funding Types Depend on Your Unique Business
Since your business is unlike any other there, the best business finding solutions are specific to your organization. Therefore, it’s worthwhile to evaluate your organization and consider your current situation and future goals. By considering the factors above, you can make informed decisions that propel you toward long-term success.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.