Once you start a small business, you need working capital to keep it running. You might wonder why you can’t just rely on income your business makes from sales to add working capital. You could, but as a small business this income will be very limited and needed to cover overhead costs. That’s why you will need business financing either in the form of loans or another option. There’s a lot of ways you could get financing, but here’s a guide to some of the most common options.
Small Business Loans Or Lines Of Credit
Loans are usually the most preferred way to finance a business because you can get a lump sum of capital that can cover a lot of things. There are also lines of credit where you can borrow up to a certain amount of money, but you only have to repay the amount you used as opposed to repaying the entire principal. According to the experts at Lantern Credit, “Unlike a personal loan or long-term business loan, a line of credit gives you access to a maximum amount of funding with interest only charged on the amount you borrow, rather than on the entire amount available.” If you don’t like visiting a bank to apply for a business loan, you can find a lot of different business loans online, and often with easier application processes and less wait times than bank loans. Many online lenders offer both business loans for small business owners as well as lines of credit, and you may qualify either for a micro loan or a large one. Just always watch out for higher interest rate charges or hidden fees.
Merchant Cash Advances
Merchant cash advances are another good way to get financing, especially if you can’t get a loan yet. With this business financing, you are funded a lump sum of money that doesn’t have any repayment due dates or deadlines. Instead of qualifying based on your business credit or personal credit history, you qualify based on how many credit card sales you usually make, and having a reliable credit card payment system. The principal is repaid by taking a cut of each credit card sale you make, and continuing until it’s been repaid. Merchant cash advances may work well for new businesses with few other financing options, but they may not fund as much capital as business loans, and you have to beware of their factor rates which could be high, and in some cases be the equivalent of an APR that’s higher than what you’d find with credit cards.
If you can’t afford debt financing for your business, you may want to consider looking for investors. Friends and family may be your best first investors since they may be willing to make an investment that serves more as a donation as opposed to holding equity in your business. You also might be able to pitch your business to an angel investor, but be aware these investors are often picky about the businesses they invest in and usually want the business to be one they can greatly benefit from. One other option is crowdfunding where you can pick up financing in small dollar amounts from any number of people. But instead of wanting ownership stakes in your business, they’ll usually be glad to get a few membership perks at your business for being generous. If you do decide to raise through crowdfunding, you will need to advertise it so that you can attract donors.
In conclusion, qualifying for some forms of business financing could take a little while, especially if you need to build your credit to get it. But you can get it in smaller amounts if you have a plan for how much you need and what you’ll use it for.