Business financing is a crucial part of launching, operating, and growing a business. Whether you plan to launch a new business or expand an existing business, you need capital. To get funding, companies typically take on investors or apply for business loans.
This article will discuss the different types of business financing available to small business owners — from traditional banks to online alternative lenders.
What Is Business Financing?
Business financing refers to the activities that a company undertakes to fund the many aspects of its operations. Businesses need capital to get started and expand. But, most importantly, a company needs capital to run its daily operations.
Capital is a broad term that refers to assets needed by companies to produce goods or services to make a profit. Examples include buildings, equipment, labor, intellectual properties, and financial assets. Companies raise capital from ongoing operations and through business financing.
The two types of business financing are debt financing and equity financing. Debt financing, or financial leverage, is the most common form of small business financing. It can be in the form of lines of credit, a business credit card, a term loan, invoice factoring, or crowdfunding. With equity financing, the business acquires capital infusion from an investor in exchange for equity ownership or a percentage of the company. Investors can be friends and family, angel investors, or venture capitalists.
An angel investor is typically a high-net-worth individual who provides business funding for small startups or entrepreneurs in exchange for ownership equity in the company. On the other hand, venture capital is a form of private equity and a type of financing that investors provide to startup companies and small businesses that have long-term growth potential. Venture capitalists are generally well-off investors, investment banks, and any other financial institutions.
Business Financing Options and Who They’re Ideal for
If you’re a business owner who doesn’t want to give up equity in your company, taking out a loan could be one option to finance the operations and expansion of your business. As long as the business doesn’t take on too much debt, borrowing can be advantageous.
The following are some business financing options to consider.
Small Business Loans
Small business loans are loans tailored to meet the needs of small businesses. These loans are generally processed quickly and tend to have minimal requirements and eligibility criteria.
There are two types of small business loans:
- Secured business loan: This type of small business loan requires the business to pledge collateral to secure the debt. Lenders may ask for personal or business property. But since you’re providing collateral, it lowers the risk for the lender, and you may get a lower interest rate.
- Unsecured business loan: This type of loan doesn’t require assets as collateral, except for a general lien and personal guarantee. But it can also come with higher interest rates. Additionally, to qualify, you may need a strong credit history, and your business must be profitable.
Small business loans provide companies with the funding they need to keep running and can help bridge gaps in cash flow and deal with any unanticipated business expenses. Depending on your business goals and the type of loan you’re interested in, there are several small business loan options from which to choose.
Start your search with Clarify Capital’s Small Business Loans. With an easy approval process and flexible terms to meet your business goals, you can get funding in as little as 24 hours. Prequalify for a business loan today.
Business Line of Credit
A business line of credit works similarly to a credit card or home equity line for your business. You get access to flexible cash with a set credit limit, and you only get charged interest and have to make payments for the capital you use. Businesses typically use lines of credit to cover working capital, such as buying inventory or paying for unexpected costs.
However, to get approved for a line of credit, you typically must show creditworthiness, and your business must generate a certain amount of revenue. But all in all, a business line of credit generally has a high approval rate. To learn more about the requirements needed to apply for a business line of credit, let Clarify Capital’s dedicated advisors help you.
Invoice factoring is a way for businesses to borrow money using their accounts receivables as collateral. In essence, you sell your unpaid invoices to a factoring company, and they get paid when they collect from your customers. It may also be considered an advance on your outstanding invoices.
Before you sign a contract, though, understand that there are two types of invoice factoring: recourse or nonrecourse. With a recourse factor, you’re ultimately responsible for the invoice. If a customer doesn’t pay, you’re obligated to buy back the invoice or replace it with a more current receivable. With nonrecourse invoice factoring, you’re not obligated to repay or replace the unpaid receivables.
The factoring fee ranges from as low as 0.5% per month depending on the invoice amount, your sales volume, and your customer’s creditworthiness. And since invoice factoring is typically based on the credit rating of the invoiced business, there’s no personal credit requirement.
Get instant access to capital with invoice factoring through Clarify Capital. We’ll compare 75-plus factoring companies to identify the lowest factor rate possible.
The U.S. Small Business Administration (SBA) is a federal agency that provides counseling and capital through loans and business grants. They also provide contracting expertise, help in community development, and other resources for small businesses. SBA loans are small business loans partially guaranteed by the SBA, which means, if a business defaults on payment, the government pays the lender the guaranteed amount.
The SBA guarantees up to 85% of loans up to $150,000 and 75% of larger loans. Due to the guarantee, the number of loan applications, and strict requirements, these loans can be a little difficult to obtain. However, it’s worth a try because they offer flexible terms and low-interest rates.
The requirements for an SBA loan include an unconditional personal guarantee from everyone with at least 20% ownership in a company. The business must also be at least two years old and making a profit. In addition, the owner of the business must have a good credit score of 690 or higher.
The SBA has several loan programs issued by lenders like banks and credit unions. Some examples of SBA loans include microloans and the 7(a) loan program. With microloans, small businesses can borrow up to $50,000 to purchase inventory, equipment, or machinery. Meanwhile, if you get approved for the 7(a) loan program, you can borrow up to $5 million to launch or expand your business operations.
Are you interested in learning more about SBA loans and applying? Check out our SBA Loan page for general requirement information and speak with a Clarify advisor to guide you through the application process.
Equipment financing, also called an equipment loan, helps small business owners buy equipment without paying out of pocket upfront. Equipment loans are available for all kinds of industries, businesses, and purchases. And the application process is generally quick because these loans tend to require less documentation.
With equipment financing, the asset you’re buying serves as collateral for the loan. If you don’t pay your loan, the lender can repossess the equipment. But equipment financing is still a cost-effective and low-risk way to buy assets for your company than other forms of financing. For instance, you can negotiate loan term lengths depending on the expected life of the equipment.
If you’re interested in equipment financing, Clarify Capital can help you borrow up to 100% of the equipment value and get funded within two days.
Short-Term Business Loans
Short-term business loans are the most popular way to fund a business because they provide flexible financing options. These loans offer small business owners access to capital that they can use to pay for unexpected expenses, take advantage of profitable opportunities, and grow their companies. With short-term loans, you receive a lump sum amount and pay it back at a fixed interest rate within a defined repayment period.
Most short-term loans follow an amortization schedule and have a repayment term of five years or less. They’re also typically issued to fund a specific investment for a small business with no collateral needed. With qualifying loans, Clarify Capital structures term loans with early payoff incentives to help reduce your cost.
Working Capital Loans
Working capital loans, also known as operating business capital, are used to fund the day-to-day operations of a business. Examples of operating expenses include office space rent, payroll payments, and inventory purchases. In contrast, most business loans are intended to finance the purchase of long-term assets, like equipment and vehicles.
Compared to other business financing options, working capital loans have shorter terms and lower amounts. They’re also available in the form of short-term loans, business lines of credit, and invoice factoring. When you apply with Clarify Capital, your dedicated advisor will guide you through each working capital option based on your specific needs.
Merchant Cash Advance
A merchant cash advance (MCA) allows a business to receive cash immediately in exchange for a percentage of its future sales. It’s also called a credit card processing loan because it’s only available to companies that accept credit card payments or other receivables through a business merchant account. So, an MCA is technically not a loan but an advance based on past credit card receipts, the business’s creditworthiness, and future sales.
With a MCA, the small business and lender agree to an advance amount, a payback amount, and a holdback percentage. Each day, the agreed-on holdback percentage is withheld from the daily sales to pay back the MCA. The holdback percentage will apply until the advance is paid in full.
But since repayment is based on a percentage of the daily balance in the merchant account, paying it back depends on revenue. Thus, with more sales, the business can pay back the advance faster. But during the days when business is slow, it’s not obligated to pay more.
MCAs can be a quick, easy way to get funding with no collateral or personal credit requirements for business owners. Cash advances are an excellent option for companies that need capital but don’t want to take on more debt. Check with a dedicated Clarify Capital advisor to see if you qualify for a merchant cash advance today.
How to Get Financing for Your Business
From the discussion above, you probably have a clearer idea of the type of business financing you need. Next, determine how much you need. To increase your chances of getting approved for a loan, it’s also best to understand the requirements and qualifications of lenders before applying for a loan. Find out more about how to determine the amount you need and lender requirements below.
Determine How Much Financing You Need
It’s very important to determine the right amount of money to borrow for your business needs. If you take on too much debt, it can cause strains on your business in the long run. On the other hand, if you don’t get enough funding, you might not be able to execute your idea to grow your business.
So, the goal is to figure out why you need the funding, how you’ll use it, and how much you should ask to borrow. Here are some steps to determine how much financing you need:
Determine why you need a business loan. It’s a good idea to understand how you’ll use the loan because it will help you identify what type of loan for which to apply. Some common reasons businesses get a loan include:
- To take advantage of growth opportunities
- To cover gaps in cash flow
- To handle emergencies
- To purchase new equipment
- To buy inventory
- To pay for advertising and marketing
- To pay salaries and taxes on time
- Identify how much you need to borrow. Calculate the amount you need to achieve your business goals. For instance, if you’re planning to expand your business by introducing a new product, make a list of what you need to make that happen. Be realistic with each expense as much as possible. Then, look at what funding options are available for you.
- Calculate how much your business can afford to borrow. Before taking out a loan, you should have a plan on how to pay it back. To make sure you can make monthly payments on time, you need to know your income and expenses. You should also make projections to make sure you can service the loan. You should also consider the interest rates and other costs of borrowing when calculating your loan amount. Having all the numbers can help you decide on the small business financing options to pursue.
What Lenders Want to See Before Financing
Qualifications and requirements vary between lenders and the different types of business loans. Generally, traditional bank loans and SBA loans have strict requirements, while some peer-to-peer and online lenders can be more flexible. But, for the most part, the general requirements lenders have to include:
- Time in business: Loan providers use your time in business to assess your creditworthiness and their risk in lending to you. So, the longer your business has been in operation, the lower the risk for lending companies. To qualify for loans, most lenders require that you be in business for at least six months.
- Cash flow and income: Most lenders require businesses to have a consistent cash flow and income to qualify for loans. Knowing you have consistent cash flow helps lenders calculate the amount you can borrow.
- Credit score: A credit score represents your payment history, the amount of debt you have, and the length of your credit history. There are business loan options available for both good and bad credit scores. But a higher credit rating typically helps you get better interest rates and repayment terms. Higher scores mean you have been responsible for your debts in the past, and this looks good to any lender.
Clarify Capital Is the Easiest Way to Get a Small Business Loan
Running a business is about managing your cash flow to make a profit and looking for opportunities to grow your company. Sometimes, taking out a loan is necessary to do both, which is why understanding your loan options is important. Business financing can help you deal with emergencies or pursue additional income-producing opportunities.
At Clarify Capital, we can help you secure financing that backs up your ambition so that you can be more than a business owner. With the right funding, you can be an entrepreneur, visionary, and innovator.
Clarify Capital works with more than 75 lenders to get you the best rate, and a dedicated advisor will work with you throughout the process. Apply online or speak to us directly by calling (877) 838-3919 and receive a quick decision and funding in as little as 24 hours.