Small business owners often face various challenges when it comes time to finance their business. Large banks tend to be hesitant about lending money to startup businesses, and the interest rates on loans from other common sources, such as credit cards or home equity loans, can be very high. However, small businesses have several financing options available to them. The following are six of the most common small business financing options with an overview of each.
1. Business Loans
When it comes to financing their businesses, many entrepreneurs turn first to bank loans or credit lines from their banks. Banks are often hesitant to offer new businesses credit lines without significant assets, but this shouldn’t be a barrier for those looking to finance their businesses. Banks often lend to other local banks and other financial institutions, meaning that even small business owners with few assets should be able to secure lines of credit from community banks or credit unions.
2. Line-of-Credit Loans
Generally, a line of credit is similar to a traditional loan in that it offers a business a means to borrow money at any time. In contrast with a traditional loan, lines of credit loans differ because the borrower is only allowed to take out the amount of money they need. The rest remains in the bank’s coffers until the commercial property owner draws on it again. This means that there aren’t any advance fees or payments due, and it is much easier for a small business to pay the line of credit back each month.
3. Partner/Angel Investment
If you don’t have the means to get small business loans through traditional options, you may need to seek alternative financing methods by looking for investors. Angel investors are often local individuals who see the potential in an idea and want to be a part of its success. They can provide valuable guidance for startups. If you are unable or unwilling to find an angel investor, consider finding a partner who will invest in your company by becoming a co-owner.
4. Peer-to-Peer Lending
Peer-to-peer lending is becoming an increasingly popular method of financing small businesses. It works by bringing investors and small business owners together, eliminating the middleman. There are various sites that connect small businesses with individuals who might be willing to invest in their ideas, either as a loan or equity in the company.
5. Business Credit Cards
Business credit cards can be an easy way for small businesses to manage their cash flow. Purchases made with a business card are charged directly against the owner’s line of credit, eliminating the need to wait around for checks or other types of financing to come through before spending money on supplies or inventory. The credit lines for business cards tend to be higher than traditional credit cards and offer lower interest rates.
6. Vendor Financing
If you purchase equipment or inventory from a supplier, consider asking if they offer to finance. Many suppliers have informal programs that allow small businesses to delay payments for a fee. This option is typically only available on new equipment, but it can be an incredibly valuable tool for companies seeking to finance their operations without loans.
There are various small business financing options, just as discussed above. It would help if you always asked for a discounted rate or payment terms when approaching these financing options. For example, if a business credit card charges 2 percent per month as interest, but you can only secure 1 percent, you would save yourself $24 every year that you used the balance, not including any discounts your vendor offers for extended terms.