3 Keys to Choosing the Right Small Business Funding

Eventually, most businesses need an influx of cash. Whether it’s navigating a financial emergency, taking advantage of a business opportunity, or something else, finding the right financing option for your small business is crucial.

There’s no shortage of lenders or small business funding options out there. Small business owners have access to both traditional lenders, like banks and credit unions, and online lenders. There are term loans, U.S. Small Business Administration (SBA) loans, working capital loans, equipment financing, commercial real estate loans, and much more.

Before getting funding for a business, this guide offers three key tips to help you choose the right financial institution, type of loan, and more.

In this article:

• How to choose the right small business funding option for your situation
• How you can use money for a business once you have it
• The best way to get a business loan

Ensure Your Financing Fits Your Business Needs

Business funding isn’t free, so it’s best to know exactly how you’ll spend new capital before you apply for a loan.

If expansion is your goal, define what that looks like. It may include purchasing or leasing new property for a brick-and-mortar storefront. That may lead to hiring more employees and requiring purchasing more inventory. If you want to open multiple new stores, you must determine how much capital you need to finance the additional costs.

You’ll also need to assess when you’ll have the cash flow to meet increased operational expenses and comfortably pay back the business financing. It’s helpful to create a new business plan specifically for business funding. Know your goals, your needs, and your plans. Then, you can begin to consider which types of bank loans might be best for you.

For instance, a general term loan offers the flexibility to use financing however you want. On the other hand, an equipment loan or a commercial real estate loan may be more appropriate if you’re financing a specific purchase, since the purchase itself can be used as collateral to secure the loan. That offers additional protection should you fail to meet repayment terms.

Additional Loan Considerations

Remember, different types of financing have different eligibility requirements and interest rates. A business credit card, for instance, can be much easier to qualify for than a bank loan.

Entrepreneurs with bad credit or new businesses may not qualify for traditional term loans or SBA loans. In that case, some better business financing options may include:

• Business credit card
• Business line of credit
• Merchant cash advance (MCA)
• Invoice factoring or invoice financing

Invest In Profit-Generating Activities

While credit score, time in business, and your business’s financial statements are the biggest factors financial institutions consider on a loan application, your business plan is important. Lenders want to see you have a plan for how to spend the money to ensure you can repay the loan.

The measurable outcomes that financial institutions want to see most are simple. They want to see more revenue and greater profitability.

Some of the best ways to use new funding to increase revenue and profits may include:

• Payroll: A larger sales staff could mean more leads are being followed or more potential customers will be exposed to your products. No matter which specific type of staff you add, additional talent will often increase revenue.
• Inventory: Many manufacturers offer better prices at bulk rates, and a large base of inventory could allow you to offer the kind of prices that lead to big jumps in sales. Also, keeping your customers’ favorite products in stock is a great way to build customer loyalty.
• Equipment: There are many ways new equipment can positively impact your company’s performance. A new piece of equipment can produce your product faster or better, or it could allow you to create new variations of your product.
• Marketing: Getting funding for a business can give you a big marketing boost.

Regardless of how you choose to spend the money for your business, it’s important to use it to achieve direct outcomes you can point to next time you’re looking for business funding.

Find the Right Lender

Once you know your needs, goals, and plans and have determined how your loan will create measurable results, you can use those answers to find the perfect lending provider.

Ultimately, the best lender for you is one that:

1. Offers business funding that fits your business’s needs
2. You qualify for with your current personal credit history and business situation
3. Offers competitive interest rates on small business loans

Remember, the best way to get a business loan is to have a strong plan for how you’ll use the money, a great credit score, and strong annual revenues. You may not qualify for every loan program, so it’s important to research minimum requirements ahead of time to rule out funding options and lenders.

If you need money fast to cover a short-term working capital need, you may want to consider an online lender since the application process tends to be faster than with traditional banks. Likewise, if you have a business idea that requires upfront small business financing, online lenders tend to be more willing to lend to new entrepreneurs and startups.

If you need a large lump sum loan amount or funding to acquire a specific asset, traditional financial institutions may offer better business funding options. Regardless, it’s important to do your due diligence and establish a relationship with a lender you trust.

The Bottom Line

Getting funding for a business is a major decision. The best way to get a business loan for one entrepreneur may not necessarily be the same for another. When choosing the right business funding for you, you must identify the right funding for your specific business needs and goals, develop a strong business plan, and do your research to find the right lender for your business.

FAQs on Small Business Funding

What types of business funding are available?

There are many types of business funding, from small business loans to equity financing, crowdfunding, and a whole lot in between. Most business owners look to loans to get the capital they need.

How can I fund my business?

Existing business owners may have access to a range of business funding options, including term loans, SBA loans, equipment financing, and much more. If you have a compelling startup idea, you may attract venture capital or angel investors or launch a Kickstarter campaign to help you get your business off the ground.

What should I consider when applying for a business loan?

There are many considerations that go into finding the right business funding. A few of the most important considerations are figuring out how you plan to use the money to drive immediate profits, what type of loan you need, and what kind of lender you’d like to work with.

What’s the best way to get a business loan?

There isn’t really a best way to get small business funding. You should always know exactly how you plan to use the money and do your research to find the best loan option and lender for your business. That said, different lenders and loans are right for different businesses, so it’s up to you to identify the right choice.

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