Business plans set the tone for a small business’s success. But even the best-laid plans can’t account for every uncertainty. There will be times for every business when additional funding is needed stat. When your business needs call for a quick financial solution, it’s important to compare options and know where to turn. In this article, we explore the different financing options for small businesses and where they can get fast funding.
Why do small businesses need fast funding?
Small business owners look for funding opportunities for any number of reasons. Sometimes revenue doesn’t come in as planned, and funding is needed to cover expenses like rent or payroll. Uncontrollable circumstances like a natural disaster (or a global pandemic) may also leave you in a financial jam.
But a business doesn’t have to be in trouble to consider its options. Business financing can be helpful in any of the following scenarios.
- Promoting your business: Most businesses need to invest time and money to attract new clients. Quick financing can provide a small business with the funds needed to build brand awareness if a direct competitor ramps up their ad spend.
- One-time business expenses: Sometimes debts owed cannot wait, even if the revenues aren’t in yet. Loans can be a great way to cover these obligations quickly.
- Staffing the business: In order to meet your revenue goals, a small business may need to hire and train the right staff before profits are generated. Financing can help you get the right people in place.
- Purchasing equipment: New equipment is necessary to get operations started and broken equipment must be replaced or repaired in a timely fashion to avoid derailing the business plan. Fast financing may be your best bet to keep things running.
- Operational costs: Some suppliers or contracts come with upfront costs. In order to cover costs that precede income, fast financing can help jumpstart your business processes.
- Expand workspace: Whether expanding your home office or building or acquiring a brand-new building, a loan can make expansion possible.
Whatever the reason you’re seeking small business funding, there is likely a great match for your current circumstance. Keep reading to learn about some popular financing options available to small businesses.
What are the best small business financing options?
Working Capital Loans
Working capital is defined as a business’s funds that are easily accessible for operations. When a small business experiences a shortage of funds, working capital loans can provide fast financing. There are many types of these small business loans, so check with your lender to see if any of the following options may be a fit.
Business Lines of Credit
Opening a business line of credit is a great option for small businesses because they give access to fast funding whenever it’s needed. A line of credit is a type of secured or unsecured financing where the lender provides a pre-approved amount of funds for a period of time. The approved amount on a line of credit can be drawn all at once or in multiple withdrawals. Monthly payments are interest-only and are calculated only on the amount that has been withdrawn. A business line of credit is a type of revolving credit, like a credit card, so as the debt amount is paid off the funds become available again.
A business line of credit can be used to supplement income during slow or unpredictable times, which makes it a smart way to balance fluctuating cash flow. Because the entire amount is not funded upfront, it allows a small business to only borrow what they need, which is a smart way to stay financially responsible. Having an open line of credit also helps small and new businesses build business credit.
Invoices for products or services provided to customers create the accounts receivable (AR) line item on a businesses’ balance sheet. Accounts receivables are factored into a business’s assets, but they do not help cash flow issues since the money is tied up in unpaid invoices. With invoice financing, a lender advances cash to borrowers and collects a percentage of customer invoice balances as payment.
Invoice financing is a great option for startups or small businesses that cannot meet the approval requirements for a bank loan. Lenders that issue this type of financing make approval decisions based on the customer’s ability to pay, rather than deeming the borrower alone as creditworthy or not. By considering the credit history of a small business’s collection of customers, the lender’s risk is spread out so they are able to offer better approval rates.
Term loans are a traditional type of financing. A term loan gives the borrower the approved loan amount in an upfront sum of cash. Repayment terms are set before the start of the loan, and interest rates may be fixed or variable. If the rates are fixed, they will stay the same throughout the life of the loan, but variable rates will change according to market rates.
Term loans often work well for established small businesses that have good credit and consistent financial statements. Significant down payments, collateral, and personal guarantees are not uncommon with term loans. They can be a good option for large purchases or to supplement cash flow.
Small businesses use equipment financing to borrow funds needed to purchase new or used equipment. Because the equipment serves as collateral, lenders will often approve loans up to 100% of the equipment price. The repayment terms align with the useful life of the equipment, so they are not short-term loans.
Equipment financing is an option for entrepreneurs or small businesses that have not had an opportunity to prove their creditworthiness. Since the equipment is the collateral, there is little risk to the lender which allows them to have more flexible approval requirements.
SBA loans are partially guaranteed by the U.S. Small Business Administration (SBA). Since they carry less risk to the lender than other loans, they are a great option for small businesses, some nonprofit organizations, and startups. An SBA loan can be funded quickly depending on the type of loan and the lender a business chooses.
There are many different types of SBA loans available. The maximum amount of the loan and the repayment terms vary depending on the type of loan backed by the SBA. Some of the more common SBA loans are the SBA 7(a) loan, the SBA microloan, and the Economic Injury Disaster Loan (EIDL).
Merchant Cash Advances
A merchant cash advance gives a small business a sum of cash upfront and collects payments based on future credit card sales. They offer a quick financing solution for small businesses that may need a large sum of money in a pinch.
Merchant cash advances have high approval rates since payment is made with future revenue. The application process for a cash advance is much simpler than with other loans, and very little creditworthiness is required. However, a merchant cash advance comes with high-interest rates and fees, so they are best for short-term solutions.
Business Credit Cards
Business credit cards are a type of revolving credit that provides financing for businesses of all sizes and ages. There are many companies that issue credit cards to businesses, so almost any business can be matched with a card. Corporations, partnerships, and even freelancers can be eligible for a business credit card. The right card will allow your business the available purchasing power you need while building a credit history that will benefit your business’s future financing needs. If you have good credit and an established business, some companies will grant instant approval.
Sometimes working with a lender or getting approved for a credit card is not an option because of bad credit or another reason. That is not the end of the road for small businesses seeking funding options. Alternative funding may come from the following sources.
Friends and Family
Asking friends and family to invest in a small business is the way many successful companies have gotten off the ground. There is a great deal of risk with turning to friends and family for money. Borrowing funds from loved ones can put unnecessary strain on your personal relationships, as well as leave you vulnerable to legal trouble.
Bootstrapping is a term used to describe using personal funds to start a business or contribute capital to an operating business. While many big corporations got their start with bootstrapping founders, cleaning out your bank account or taking on personal debt carries a lot of risks. Financial issues with the business can impact your own financial health and personal credit.
Financing a business with crowdfunding means collecting a small amount of money from many people. Contributors can be friends, family, interested invested, or strangers. Crowdfunding generally occurs online at websites like Indiegogo or Kickstarter and has become more popular as online collaboration and social media have gained a presence in every industry. The three types of crowdfunding are:
- Reward crowdfunding – Contributors are rewarded with products or exclusive services of the business
- Debt crowdfunding – Contributors are paid back for the money they invested with interest
- Equity crowdfunding – Contributors are rewarded with future ownership rights to the business
An angel investor may invest in a startup business for the purpose of acquiring convertible debt or ownership equity in the business. Angel investors should be accredited, as defined by the U.S. Securities and Exchange Commission, and can be difficult funding sources to secure. Angel investors are often confused with venture capitalists, but a venture capital firm provides funding to businesses that have been operating for some time, not startups.
Small Business Grants
Small business grants are funds made available by government agencies or nonprofit organizations for the purpose of economic and business development. Grants have a detailed application process and most grants are available for a specific business purpose. Eligibility may be determined by the type of business you are funding or the business activities you wish to use the funds for. The Small Business Administration is a great place to go to learn more about grant opportunities.
Where do you go for fast funding?
Deciding where to turn for fast business financing depends on a number of factors including:
- The amount in funding you are seeking
- The timeframe in which you need to secure funds
- The age of your business
- The credit score and history of your business
- Your personal credit report
Traditional lenders, like banks and credit unions, have strict underwriting processes, so the application and approval processes are more involved. Qualifying for a traditional bank loan generally requires appointments at the bank and a lengthy application process. While many traditional lenders can offer low interest rates and longer-term loans for creditworthy customers, they are not a common solution for a business owner seeking fast financing.
A faster financing option is working with an alternative or online lender, which are private companies. Many online lenders have more flexible approval processes, so they are able to fund a more diverse group of small businesses. Alternative lenders can be described as a one-stop-shop as well because they offer many different loan programs under one roof.
If you are looking for fast financing for your small business, alternative lenders may be your best bet. Many lenders are able to get working capital loans approved in as little as 24 hours. However, the downside is that you might end up paying higher interest rates, so make sure it makes business sense for you. Sharing your current situation and business goals with a lender will allow them to advise you on what type of loan is the best match for your small business and exactly how long the process can be expected to take.