Business financing is a funding option for business owners to be able to pay for things like expansion projects, inventory and equipment, and seasonal spikes in activity. There are several different types of business financing available, but each type of financing may be better for some purposes than others. There are several ways your business can obtain financing. This includes taking out loans, selling stocks or bonds, using personal savings, and so on.
Obtaining business loans for small business may involve turning to traditional bank loans. This type of loan can prove to be a slower and more difficult option for business owners. The application process usually requires a credit inspection, a business plan/industry risk, and collateral. Additionally, approval can take up to 30 days or more, even if the business has good credit and provides collateral.
Every business, at some point in its lifecycle, will need funding. Sometimes at multiple points. Consider the following examples: An established company wants to expand into new markets, develop new products, or buy up a competitor. A struggling company needs help to get back on track. A small business wants to meet a sudden spurt in demand. In any of these cases, business funding is the glue that binds the objective to the desired outcome. It’s what allows an established business to gain new market footholds, and a struggling one to keep from going belly-up.
Now that you know what business financing is and its key benefits, let’s turn our attention to the various types of business funding. As we’ll see, debt and equity are the two most common types of funding for a small business, but there are other sources of funding for businesses too.
Debt financing is the most common type of financing available to small and mid-size businesses (SMBs). Debt is simply money borrowed from outside of the company that must be repaid with interest over time. It’s used to make investments, increase working capital, or purchase fixed assets like equipment or real estate. Debt offers many advantages. For one, it lets companies raise large amounts of cash with little or no equity investment from their owners. Debt financing interest rates are also typically lower than those for equity investments. That’s because banks are more willing to take on risk than individual investors. For instance, a bank may be willing to lend money at an interest rate of 3%, while an angel investor might require 15% or more annually for an equity stake in your company. Most importantly, lenders want repayment rather than ownership in your business. Sources Debt can be in the form of bank loans, lines of credit, bonds issued by corporations and governments, or notes payable to shareholders. Other debt sources of financing for small businesses include suppliers, trade finance, supply chain finance, etc.
Differing from traditional lenders, one way to receive financing for an existing business is by selling shares of it to investors. This is known as equity financing, which can come either from an angel investor (a wealthy individual who helps fund startups) or an investment firm. When you choose equity financing, the people or firms that invest in your company become part owners. Equity financing also refers to a type of business financing whereby a company raises money by selling ownership shares. Despite being a time- and labor-intensive process, equity financing is the best option for businesses that don’t want to take on debt. For example, if a car dealership wishes to expand, they can receive capital from an investor in exchange for a certain amount of ownership in the business. This is known as an “equity investment” or “share capital investment”. Note that investors use this type of financing as an opportunity to make money. They typically receive dividends at regular intervals—either quarterly or annually—based on the company’s profits. This type of financing is best used for high-growth potential startups, businesses with innovative ideas, and expansion plans. Sources Equity financing is typically obtained through less traditional routes than debt financing. This includes venture capitalists, angel investors, crowdfunding—even your family and friends. An initial public offering (IPO) is another way to secure equity through the stock exchange.
Revenue financing is another common type of business financing. It can be obtained through loans, a credit card, or invoice factoring. Revenue financing is also referred to as “working capital financing”. Basically, it’s the process of obtaining money from a provider by using your business’s future revenue as collateral. You can think of it as a form of debt financing in which the provider agrees to give you a loan if your business proves it will have enough cash flow to pay it back with interest. Revenue financing can be used for many purposes, like buying new equipment and supplies, or paying off existing debt. Sources Revenue-based sources of financing for business include specialized lenders, alternative lenders (such as trusted online lenders), private investors, and certain government programs.
Lease financing allows you to acquire the use of an asset without having to purchase it. There are two types of lease financing agreements: Operating/Purchase Lease This allows a company to use a piece of equipment or other physical asset for an agreed-upon period at a fixed monthly payment. This is typically used for short-term projects and doesn’t require a large down payment or long-term commitment. Typically, you’ll cover all maintenance and repair costs while the owner is responsible for depreciation, insurance, and taxes. Capital/Finance Lease This type of lease allows a company to use an asset without having to pay the upfront costs associated with purchasing it. Instead, it allows them to pay for the asset over time and then own it after completing the contractual payments. Sources Sources of financing a business lease include equipment leasing companies, manufacturers, private investors, banks, and other financial institutions.
Mezzanine financing provides an alternative to bank loans. In fact, this source of business financing is commonly referred to as “middle-market” financing, since it falls somewhere between a traditional bank loan and private equity funding. Mezzanine financing can be difficult to obtain. It’s typically given to businesses that (1) have demonstrated profitability, (2) have a high potential for growth, and (3) lack good credit or collateral. Mezzanine lenders are willing to take on higher risk in exchange for higher interest rates. They want to earn more than they would from a typical commercial loan, but aren’t willing to fully back a project as an equity investor would do with an IPO. Mezzanine loans typically range from $2 million to $100 million, depending on the size of your company and its capital needs. Terms can last from one year to five years, or even longer. Sources There are many ways to obtain this source of financing for business. This includes hedge funds, private equity firms, and even specialized mezzanine lenders.
When considering financing options, many business owners turn to traditional bank loans as their initial financing choice. This type of loan can prove to be a slower and more difficult option for business owners. The application process requires a credit inspection, a business plan/industry risk and collateral. Additionally, approval can take as long as 30 days or more, even if the business has good credit and provides collateral. Traditional bank loans are best used for established businesses with solid credit history, long-term financing needs, or larger investment projects. Sources Traditional banks can be found just about anywhere, and if you decide to go this route, we recommend working with a bank you already have a relationship with.
A personal loan can also be a good option for business financing. It’s an unsecured loan that you get from a bank or other financial institution. It typically isn’t intended for general business operations, but is rather designed to meet specific business needs. The average personal loan amount ranges between $35,000 – $40,000. Sources This type of loan may also be available from banks or other financial institutions with whom you have an established relationship.
Although small businesses play a vital role in the economy, business owners tend to struggle to get approved for bank loans. To encourage the growth of small businesses, the Small Business Administration (SBA) partners with lenders to partially guarantee small business loans. There are several different types of SBA loans, including 7(a) loans, which can be used for many different purposes, CDC/504 loans for major purchases like real estate, and disaster loans. These loans are best used for small businesses lacking collateral, startups, real estate or equipment purchases. Sources Businesses can obtain SBA loans from a variety of sources. These include traditional banks, credit unions, and online lenders. The SBA partners with these institutions to provide government-backed loans, designed to support small businesses with more flexible terms and lower interest rates.
Many businesses need a little extra money to handle a temporary, short-term need. In these types of situations, business owners often don’t want to be paying off a loan with high interest rates for years after the original need for the loan has been resolved. Short-term loans offer small business owners the funding they need while avoiding lengthy loan applications and long repayment terms. These types of loans are best used for businesses needing immediate working capital, bridging cash flow gaps, and covering unexpected expenses. Sources Businesses can secure short-term loans from online lenders, traditional banks, and credit unions. These loans are typically for a year or less and are designed to address immediate financial needs.
Many lenders require a valuable asset to be used as collateral to secure a loan during the application process. But many businesses don’t have the types of assets lenders look for and the business owner might not be comfortable with using personal assets like their home or vehicle. Unsecured loans are a type of business loan that does not require the borrower to put up an asset to be used as collateral. You can use these types of loans for small businesses lacking collateral, short-term financing needs, and investment in marketing or inventory. Sources These loans, which don’t require collateral, can be obtained from online lenders, peer-to-peer lending platforms, and some traditional banks.
Not all business expenses require large loan amounts. Businesses seeking smaller loans are often turned down by banks because they aren’t seeking enough money. To help fill the gap, many lenders have started offering microloans, which have loan amounts that are much smaller than traditional bank loans and come with shorter repayment terms. Microloans can be a good option for a new business or businesses that have low credit scores, no credit history, or have never received a loan from a bank before. These loans are best used for startups, businesses with low credit scores,and purchasing equipment or inventory. Sources Microloans are often sourced from nonprofit organizations, community-based lenders, and online platforms. The SBA also offers a microloan program for small businesses and startups.
When you have to wait for customers to pay their invoices, you have less working capital available in your bank account to cover day-to-day business expenses. While your customers may appreciate not having to pay immediately, this is the money used to take care of your business. Invoice factoring allows business owners to turn their outstanding invoices into money they can use right away.This is done by selling those invoices to a third party, known as a factor, at a discounted rate. The factoring company then collects the full amounts of the invoices from your customers. Invoice financing is another small business financing option similar to invoice factoring. The difference between the two is that while invoice factoring involves selling your outstanding invoices, invoice financing is a loan based on the value of your invoices. You can use invoice factoring for businesses with outstanding invoices, seasonal businesses, and improving cash flow. Sources Businesses can get invoice factoring from specialized factoring companies or alternative online lenders that offer this service to improve cash flow.
Whether it’s desks and computers or specialized tools and machinery, all types of businesses need equipment. Although many types of general business loans can be used for equipment, some loans are specifically intended to be used for purchasing equipment. Since equipment loans can be secured with the equipment itself, borrowers do not need to provide any extra collateral. Businesses can use this type of loan if they need to purchase or upgrade equipment, and in industries reliant on specialized machinery. Sources Traditional banks, credit unions, and online lenders provide equipment loans specifically for the purchase or lease of business equipment.
If a business that typically has a high volume of credit card transactions needs some extra funding fast, one way to get it is through a merchant cash advance. Technically, a merchant cash advance is not a loan, it is a purchase of future receivables from your credit card revenue. Since this is a transaction rather than a loan, they are an option for businesses that have a hard time getting traditional business loans because of a bad credit score. These are best used for retailers, restaurants, businesses with high credit card sales, and short-term cash flow needs. Sources This type of financing is available from alternative lenders and specialized financial companies that provide advances based on future credit card sales.
No matter how careful you are about managing your company’s finances, unexpected expenses can happen to anyone. To make sure they’re ready to handle any unpredictable expenses that might come up, many business owners like to have a business line of credit available to them. Unlike a loan from a financial institution, which can only be borrowed against once, a line of credit can be borrowed against multiple times. The best part is, you only pay interest when you use it. You can use a line of credit for businesses with fluctuating cash flow needs, covering operational expenses, and managing seasonal fluctuations. Sources Banks, credit unions, and online lenders offer business lines of credit, providing flexible access to funds as needed.
Just like starting any other kind of business, becoming a franchisee takes money. You’ll need to pay for things like equipment, a location, marketing expenses, and inventory, not to mention your franchise fees. A franchise loan can help you get the money you’ll need to get started. You can use franchise financing for startups or expansions, and businesses with established franchise partnerships. Sources Franchise financing can be obtained from traditional banks, online lenders, and sometimes directly from the franchisor.
The right location can make a big difference in the success of your business, but most businesses aren’t able to pay for a real estate purchase all at once. Instead of taking out a mortgage the way a person would to buy a house, businesses have many different real estate financing options available to them. These options include term loans, commercial real estate loans, and SBA loans. This kind of financing is best used for businesses seeking to acquire or expand their property holdings, generate rental income, or utilize real estate assets as collateral for additional financing. Sources Commercial real estate loans are available from traditional banks, commercial mortgage lenders, and online lenders specializing in business property financing.
Do you have a warehouse or storeroom full of inventory? Inventory financing is an option that allows you to use your unsold inventory to get the capital you need to help your business handle temporary, short-term cash flow shortages. Inventory financing is best used for businesses that rely heavily on inventory, such as retailers, wholesalers, and manufacturers, to ensure consistent supply, manage cash flow, and support sales growth. Sources Businesses can secure inventory financing from traditional banks, online lenders, and specialized financial institutions that provide loans for the purchase of inventory.
Though far less traditional than other forms of financing, crowdfunding is a popular low-cost option for small businesses. Instead of taking out a loan or line of credit, businesses are funded by interested individual investors across the globe. Business owners can exchange their own goods and products for investments, and can start the process right on the internet. This method is a good choice for those who are starting a new business because it can bring in money without interest rates, deliver market validation and widen the scope of customers. Crowdfunding is best used for businesses with innovative ideas, creative projects, or social causes that resonate with a wide audience. Sources Crowdfunding platforms like Kickstarter, Indiegogo, and GoFundMe provide a way for businesses to raise funds from a large number of people, typically in exchange for rewards or equity.
If your business requires funds that are flexible and terms that are shorter, a working capital loan may be the best option. This type of loan allows businesses to grow without the stress of spreading funds too thin. A working capital loan requires businesses to have a 500+ credit score, 6+ months in business and $15,000+ average monthly bank deposits to be considered for approval with Lend Bucket. These are best used for businesses experiencing temporary cash flow shortages, seasonal fluctuations, or unexpected expenses. Sources Working capital loans can be obtained from traditional banks, credit unions, and online lenders. These loans are designed to finance the everyday operations of a company.
Now that we’ve covered the different types of business funding and the sources of small business financing, let’s explore the six-step process of deciding which option is best for you.
Before you even begin to consider the various types of funding for small businesses, determine your funding needs. Start by creating a solid business plan outlining your objectives, competitors, customer demographic, and financial projections over the coming years. Doing so will give you a bird’s eye view of your business, allowing you to assess the type of financing you’ll need. For example, bank loans are a great way to get money fast, but a line of credit may be a more efficient and flexible long-term solution.
As we’ve seen, there are many available sources of business funding. Traditional sources include banks and the Small Business Administration (SBA). Alternate lenders also exist, which we discuss at length below.
No funding option is perfect. Take the time to seriously consider the pros and cons of all types of business funding models.
For instance, self-funding may be easy to obtain, but could put your personal assets at risk. Likewise, friends and family may be a good source of funding for a business, but it could strain relationships if you’re not able to repay the loan.
All business funding types are subject to their own cost structure. Some options, such as grants or self-funding, may not involve any costs at all, while others (like venture capital or small business loans) may involve high fees or interest rates.
Once you’ve settled on the optimal types of business funding sources, you’ll have to find the right lender. Each lender will have their own loan terms and conditions. For instance, some venture capitalists may ask for a substantial stake in your business, while others might want a seat on your board of directors. Remember, the devil is in the details here.
Whether you’re opening your first business or you’re an experienced owner, choosing the best funding source for your business can be complicated. That’s why it’s worth consulting a trusted professional such as an accountant, attorney, or financial advisor. They can help you navigate your options and make the right choice.
Now that we know what business funding is and who should consider it, let’s look at nine benefits.
Your daily operations benefit enormously from access to funding. Not only does it help you stay on track with your day-to-day expenses, but financing also allows you to take advantage of new opportunities without disrupting cash flow.
One of the most substantial benefits of business financing is that it gives you the capital you need to grow and expand. Whether you’re looking to open new locations, develop new products, or enter new markets, financing can help to achieve your long-term objectives.
With access to financing, your company can invest in new technologies, equipment, or other resources that make you more competitive. This also helps boost sales and secure a larger piece of market share.
Risk management doesn’t sound fun, but it represents an important facet of your business. By spreading the costs of starting or expanding a business over time, financing lets you manage the risk associated with these types of investments.
Demonstrating that your business has access to financing can help improve its credibility with customers, suppliers, and other key stakeholders. This makes it easier to secure future financing, attract new investors, and convert potential buyers.
A steady stream of available capital is one of the best ways to improve decision-making. It gives your business the opportunity to collect and analyze financial data, allowing you to make better choices regarding the future allocation of resources.
Many types of financing come with the added benefit of access to expert advice and guidance. This is invaluable for companies looking to grow and flourish in their industry.
By providing a company with the resources it needs to grow and succeed, financing can boost employee motivation and job satisfaction.
Believe it or not, business financing can provide tax benefits, such as deductions for interest paid on loans or investment tax credits. In the next section, we discuss the types of business finance that offer tax benefits.
When it comes to business funding, the biggest hurdle most owners face is the application process. Not only is it painstaking, but you open up your business to financial scrutiny. Many lenders are, first and foremost, looking to partner with you, and approach your financial assessment from this standpoint. Organizing and submitting the proper documentation is essential to secure a source of funding in business. Doing so will streamline your application and improve your odds of approval. Note that the type of financing you apply for will dictate the documentation needed. With this in mind, let’s look at a general list of documents you’ll need.
Just like there are many different types of funding a business can obtain, so too are there many sources of financing for a small business. Let’s look at some popular alternative options.
As the name implies, this requires you to figuratively pull yourself up by the bootstraps—meaning the funding will come from your personal savings or assets.
Friends and family members can be a reliable, low-interest source of funding. Of course, you’ll need to be especially considerate in devising terms both parties are happy with.
Sites like Kickstarter and Indiegogo are a great way to raise money from people interested in your product or service.
These are independently wealthy people who invest their own capital into your business, usually in exchange for a stake in it.
This refers to companies that invest venture capital into high-growth businesses in exchange for shares.
These are provided by governments for specific purposes. That said, there are many other types of organizations that offer grants.
The SBA is a government-backed organization that helps SMBs secure financing. This source of financing a business is designed for those that may not qualify for traditional loans.
These are small loans, typically in the range of $50,000 or less. They’re offered by microlenders to small businesses.
This is when a business sells its accounts receivable to a third party, known as a factoring company. The catch is that you have to sell at a discount in exchange for immediate cash.
Online lenders and peer-to-peer platforms offer business loans at competitive rates, without needing collateral. Many online lenders are renowned for their extremely fast turnaround times. For example, Lend Bucket helps businesses secure funding in mere days—saving you weeks of anxious waiting associated with transitional lenders.
There are 12 key questions to ask when preparing to apply for business financing.
Asking these questions—and taking the time to consider the answers—will guide you in making the right choice for your business.
The more prepared you are to apply for business financing, the smoother the application process will be. In order to increase your chances of approval for any of the financing options mentioned above, consider preparing the following:
Deciding between fixed and variable rates for your small business funding source can be tricky. Each option comes with its own unique advantages and disadvantages. To put things into perspective, let’s touch on some key points to consider.
Click the “Get Started” button, enter some basic business information, and pre-qualify for loans for your small business.
Once approved, a loan advisor will reach out to you with the options you qualify for and help you choose the best business loan or financing product for your situation.
Funds are deposited directly into your bank account so you can use your funding immediately
No matter the industry, all businesses need money to operate. Funds can be used toward business needs such as equipment, hiring additional employees, buying equipment, or paying for an office. However, when a business doesn’t have enough money on hand to handle expenses, it can use business financing to continue operating. Growing a business is one of the most rewarding things you can do, but it’s not without its challenges. Truth be told, even with an airtight business plan and a dream team by your side, success largely depends on your ability to finance the venture. And, understandably, you’re now wondering about the different types of business finance. That’s why having access to the right financing options and funding sources can often mean the difference between success and failure. In this article, we explore everything you need to know about business loans and financing. We’ll discuss the different types of funding, their pros and cons, and the main sources of funding for a business.
Small business financing made easy with Lend Bucket. We want to help you answer this question before starting your loan application process. We’ve put together a shortlist of pros and cons to get you started.
Lend Bucket’s mission is to provide small and medium-sized businesses like yours with streamlined access to the funding you need to operate and grow.
Lend Bucket helps small and medium-sized businesses get funding. We strive to be a trusted and committed partner to you, our customers. We make getting loans for businesses affordable, simple, and transparent.
Lend Bucket is a direct lender of working capital loans and merchant cash advances. Through our partners, we offer SBA loans, business lines of credit, equipment financing, long-term loans, and invoice factoring.
Our financing experts can help you:
We work with small and medium-sized businesses to connect them with much-needed capital. Lend Bucket combines data science with a human touch, and we work directly with you to get the best company loans or financing for your unique needs, so you can focus on your products and services.
Some funding products like merchant cash advances and invoice factoring are less credit dependent because these financing products are based on sales instead of a credit report.
Similarly, equipment financing does not have as much emphasis on credit because the equipment can be used as collateral if you default on your loan. Many of our financing solutions can help you build business credit as well.
The eligibility requirements for Lend Bucket’s small business loans and financing depend on which one you’ve selected and are based on a business owner’s specific credit history and creditworthiness. Generally, you need to have:
Specific requirements will vary.
Before asking “how to apply for a small business loan or financing?” you should first consider whether the capital will help your business grow or help your business survive a crisis.
If you don’t have a good reason for business financing, the fees and interest can really add up.
However, if the business financing will help you buy new equipment, hire needed staff, or survive a crisis like the COVID-19 pandemic, then you should consider each of the following questions when reviewing the financing option.
Startups almost never qualify for traditional bank loans, and that is true for Lend Bucket’s business loans and financing as well.
However, there are a lot of options in small business loans and financing for new businesses and startups, including:
How can I use a small business loan or financing?
“Flexible” means that you can use the capital to fund whatever your business needs.
Some business financing is flexible in its usage, such as a working capital loan, business expansion loan, merchant cash advance, business line of credit, or SBA loan.
However, some loan and financing options are not flexible. Equipment financing can only be used to purchase or lease equipment. Any type of real estate loan will also be specific to funding a physical business location.
Wondering “how do I get a business loan”? Take ten minutes to pre-qualify for small business loans online and we will respond with the best funding options for you. You can get funds in your bank account in as little as 24 hours.
Lend Bucket’s mission is to provide small and medium-sized businesses like yours with streamlined access to the funding you need to operate and grow.
When the traditional banks say no, we talk to you about your business. It’s why we’re
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