Business Financing Options for 2018

How to source Business Financing - Top 6 Business Funding Options for 2018

Many new and existing business owners struggle when it comes time to decide what type of business financing is best for their operation. A variety of lending and funding sources exist, with more popping up every day. A current or future business owner will need to carefully consider their goals, whether it be to start or grow a business. Every funding source carries risk and costs associated with it, some more than others. Choosing the right lender or funding entity is as important as the type of funds received, like a small business loan or other funding method. In this article, we will examine some of the most popular types of business funding and give an overview of some of the benefits and risks.

  • Loans - The Most Common Form of Business Financing

    When seeking business financing for their companies, many people start by exploring the different types of loans that are available to them through banks and other financial institutions.

    Business loans have traditionally been the go-to option, and for good reason: banks are usually very accessible, government-regulated and insured, and offer a variety of interest rates and repayment plans. In this day and age, many innovative, customizable business loans have been developed, and several are offered by non-bank financial institutions.

  • Traditional Loans

    Obtained through a bank, traditional loans offer structured repayment terms and either a fixed or variable interest rate. To qualify, business owners must submit personal and business financial records for credit assessment. Business loans can be used for almost any purpose, but in some cases will be connected to a specific project or piece of equipment as collateral, such as a construction loan or a loan to purchase a new vehicle. Since banks are heavily regulated, these loans usually carry the most stringent credit and repayment requirements.

    A traditional loan is usually granted and disbursed as a lump-sum payment to the borrower. Principle and interest is repaid over a preset term (in years or months) and has a fixed monthly payment amount. This is the most common form of business financing.

    Learn More about Traditional Business Loans

  • Government-Backed Loans

    The federal government, through the Small Business Administration (SBA) has several loan programs that offer business owners low- or no-interest repayment plans to start or grow their businesses, or to recover from disasters.

    Designed to stimulate the economy and promote business ownership, SBA loans aren't offered directly by the government, but can be obtained through banks or other entities (like nonprofits and community organizations). Loan programs from the SBA have specific personal qualification and business-type requirements. An SBA-backed loan is notoriously one of the most difficult forms of business financing to obtain due to the stringent requirements.

    more about SBA Loans

  • Non-Bank Lending Institutions

    Sometimes, business owners either cannot qualify for a traditional bank loan or may desire a more flexible repayment option. In these cases, non-bank lending institutions exist to offer loans that banks cannot. These lenders can include online-only companies, in-house financing by equipment manufacturers or retailers, and others like lending clubs.

    Since these companies exist outside of the traditional banking world, they can offer loans to business owners who may have troubled credit histories or limited experience, and may venture into areas of business that banks traditionally view as higher-risk (restaurant funding, for example). Interest rates and repayment plans are still subject to limits put in place by federal and local law but are typically at the discretion of the lender, which may mean higher cost to the customer over time.

    Learn More About Non-Bank Lending Experiences

  • Lines of Credit

    Like loans, lines of credit can be obtained from banks or other entities, and generally require a credit and financial assessment prior to receiving funds. The main difference between the two is that lines are set up to be drawn against up to a certain amount. Business owners who receive lines of credit are not required to take the entire amount they are approved for up front and may choose to draw over time - much like a credit card. Interest rates and payment terms are set by the lender, but payments don't start until there have been funds drawn against the line.

    Lines of credit are a flexible way for business owners to obtain funding, as the money can be used as needed for things like operating expenses, payroll, and other general needs. Care must be taken in withdrawing funds, however, as the line of credit should not be treated as a regular source of additional income - only being drawn upon when receivables or revenues are delayed or when a short-term financial bridge is needed.

    Learn more about a Business Line of Credit

  • Crowdfunding

    As a relatively new development, crowdfunding has become a popular option for people looking to start a business or develop a new product, service, or innovation. Crowdfunding is very different from traditional loans, in that the funds received do not have to be repaid and once funding is received the money can be used for any purpose.

    There are a variety of these platforms, each carrying their own rules and requirements to both donate and obtain funds. Some platforms, such as Kickstarter, will require that the funding campaigns be at least 100% successful (dollar goals met) before any amount of money can be withdrawn by the requestor. Others do not have this requirement but may have limitations on the types of businesses or projects that can receive funding and may also limit the purposes of those funds once received.

    Even without the need to repay, receiving funding from crowdfunding platforms is not without risk. Campaigns on these sites are very public and can influence the opinions of potential clients and customers, sometimes negatively. There may also be scrutiny from funders on how the money is used and how quickly a certain product or service is delivered.

  • Angel Investors or Venture Capital

    Funding from an angel investor or venture capital firm has become a very popular concept in recent years, with the boom of technology companies and popular TV shows like Shark Tank bringing both funding sources into the mainstream.

    The reality of both is not quite as glamorous, in that neither is easy to obtain, and both carry significant risks. Should a business owner choose to pursue funding from one of these sources, they must first locate an individual or firm willing to hear their pitch, and then negotiate an arrangement that usually involves giving up some portion of their ownership stake in the business.

    There may also be some requirement around management style, board membership, and overall direction of the business. Anyone considering pursuing funding through an investor will need to carefully weigh the costs of investment against their long-term goals for the business.