The bottom line is that a small business needs cash, especially in the beginning and growing stages of their life cycle. But knowing how to finance a small business can be challenging to some business owners.
Finding the right source can be a challenge in itself. That’s why we want to help.
We’ve developed this guide of small business financing tips to help you learn the right way. Keep reading to learn how to finance a small business in 2019.
Questions to Ask Before You Finance Your Small Business
Before you try to obtain financing for your small business, you should know the right questions to ask. The worst thing you can do is commit to a loan or line of credit before you fully understand what you’re getting yourself and your business into.
Ask yourself why you need the money. If you don’t know where the funds will be allocated once you have it, you may find yourself in a worse financial situation than before you took out the loan or line of credit.
Know Your Current Credit Score and Financial Situation
Check your personal and business credit scores. This will help you to understand exactly where you are financially-speaking. You’ll then know better what type of loan or line of credit you can obtain.
Immediately clean up any errors listed on your credit history. And take steps to increase your credit score.
Speak with your account to make sure you fully understand where your business is from a financial standpoint. She or he can help you decide if you can actually afford to take out a loan and pay it back on time.
Understand the Terms and Fees of the Loan
Read the terms and conditions of your loan or line of credit contract thoroughly. Make sure you understand everything fully and are aware of any additional fees such as:
- Late payment fees
- Prepayment penalties
- Failed payment fees
- Loan processing fee
You don’t want any surprises after you’ve signed your contract. Ask your accountant to go over the terms of the contract as well.
Shop Around for the Best Small Business Loans
There are many options when it comes to finding a place to obtain a small business loan. Keep in mind each lender has their own set of rules, regulations, and fees associated with their fees.
Keep shopping around until you find one that suits your specific needs and financial situation. You should also keep your financial documents close by so you’ll have everything you need once you’re ready to fill out an application.
Use a Credit Card
Using a credit card to finance your business works to help get you out of a small, occasional financial jam. You can even use it to extend your accounts payable period as a way to shore up your cash flow.
However, it’s risky if you can’t make the payments or you can only make the minimum payments. You may end up ruining your credit score.
Crowdfunding is becoming an increasingly popular way to raise money at a very low cost to the business. You just have to set a goal for how much money you need to raise over a specific period of time.
However, some crowdfunding sites won’t give you the money unless you reach your full goal. Also, there’s no long-term ROI (return on investment) and you can’t write off donations on your taxes.
You’re also fighting for donations with hundreds of other hopefuls.
Angel investors are great because they belong to a network and can get multiple people to invest in your business. They are also familiar with business development and have far more insight and business experience than a bank typically does.
They also have private equity to spare, unlike a bank. However, while their risk tolerance is high, so are their expectations of high returns. They may expect a payoff that’s 10 times their initial investment (or higher).
If you have a lack of credit history, poor credit, no collateral or you can’t get a loan from a bank, all is not lost. You may be eligible for a microloan.
Microloans are perfect if you are a startup or have an existing business with a capital gap that needs capital to service a contract and/or buy or lease new equipment.
Microlenders require less documentation and offer more flexible underwriting criteria. However, their interest rates are typically much higher than a bank.
The Small Business Administration (SBA) also gives out loans. But keep in mind they don’t give out loans directly so you’ll have to find a lending company who provides SBA loans.
You’ll also you have to meet certain criteria such as already having been turned down by your own bank for a loan.
However, there are advantages to an SBA loan such as:
- Low-interest rates
- Low down payment
- Longer repayment terms
But there are disadvantages as well such as:
- Lengthy paperwork
- Longer wait time to get the loan
- May require collateral
You also need good credit to get an SBA loan.
Friends and Family
If you are short on time, collateral or good credit, you may want to consider asking for a loan from friends or family. However, it’s best to set up a repayment schedule in writing so you don’t ruin long-term relationships with them.
Taking out a loan is the traditional way to finance your small business. This is a great idea if you’re looking to taking any of the following steps:
- Acquiring another business
- Purchasing commercial real estate
- PUrchasing equipment
- Purchasing inventory
There are quite a few pros to taking out a loan from a bank such as:
- Helps build business credit
- Fixed monthly payments
- Low-interest rates
However, business loans aren’t for everyone. There’s a lengthy paperwork process, a longer wait time, and you’ll need good credit to even be considered.
In many cases, you may also need to put up collateral.
Get Your Loan With Us
If you decide that the best way to finance your small business is to get a loan, we can help. We make small business loans fast and easy. Just click here to start the approval process.