Factors to Consider When Choosing Your Business Financing
Small businesses and startups often begin with ideas and enthusiasm. Among the many issues that entrepreneurs should address when starting their business is the financial aspect of implementing their ideas. Most new businesses can’t secure conventional financing because they are a risk to investors and lenders. This explains why most startup businesses rely on funding from owners’ resources, including residential mortgages, consumer loans, title loans, and personal savings.
Most small businesses struggle with cash flow problems and cash shortages, which is fatal to businesses and entrepreneurs. Consider the following tips if you’ve decided to source for funds externally.
Why Do You Need Financing?
Like other entrepreneurs, you might need business financing for several reasons. Small businesses might need funding to expand business capacity in fulfilling orders, improve customer acquisition campaigns, website redesign, or for bulk inventory purchases. You might also need financing to sort out temporary cash flow problems or pay off outstanding debts.
Whatever the reason, you should evaluate your need for business financing. If you need financing to pay for overhead costs or sort payroll, you should reevaluate your business model instead of looking for financing. Financing isn’t a solution if your business is struggling.
Also Read :- The Future of Startup Financing: Emerging Trends and Opportunities for Founders
How is Your Business Performing?
The state of your business is the other crucial consideration for business financing. Lenders review several factors before approving loan requests. Common determinants include:
- Time in business – You have better chances of getting loan approval at affordable rates if your business has been operational for a while. Startups often have a hard time finding long-term loans.
- Business revenue – Most lenders have minimum business revenue requirements for funding. Your business revenue should generate enough revenue and profits to pay off the loan.
- Financial documents – Lenders and investors will need your bank statements, business plan, and tax returns to evaluate your loan request.
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Debt vs. Equity Financing
Debt financing is the most common form of financing for small businesses. However, equity financing is another viable option, which involves selling a percentage of the business to ready investors. Debt and equity financing differ in many ways, and you should consider each for different reasons.
For instance, equity financing might not be appropriate for small financial needs. If you have short-term financing needs of less than $100,000, you shouldn’t consider equity financing. However, if your business has immense potential and is looking for capital and someone with experience in the niche, equity financing is a good option.
Before applying for financing, you should understand the loan terms, especially the repayment period. Short-term loans have large recurring monthly payments, while lengthier loans have small repayments but accrue a lot of interest. As such, you should determine how much you can afford to pay back monthly.
Besides evaluating the lender’s repayment terms, you should also inquire about the lender’s flexibility. Most lenders offer flexible repayment schedules. This means the lender can extend your payment schedule or adjust monthly amounts if you or the business experience challenges. Avoid lenders with fixed payment schedules and impose direct fines for late payments. While at it, compare lenders’ loan interest rates and requirements for loan application.
Financing Options to Consider
With the above tips in mind, consider the following business financing options:
- SBA loans – You should begin your search for business loans by looking at the Small Business Administration loans program. Small businesses that meet SBA requirements can access bank loans with ease. SBA loans are low-interest, long-term business loans with several use cases.
- Term loans – These are the most common forms of business loans. Online lenders, non-profit institutions, and conventional banks offer term loans to businesses. Term loans from banks are typically long-term loans with a repayment period of five to 10 years. Unfortunately, qualifying for these loans is difficult, especially for startups. Online lenders offer short-term loans that are repayable within months or a few years.
- Business lines of credit – A line of credit is essentially a business credit card with a large borrowing limit. Small businesses and startups can access a revolving line of credit from lenders. It is a great option if your business needs flexible financing, emergency, or long-term funds.
- Crowdfunding – The popularity of Crowdfunding as a source of business finances has increased. Here, entrepreneurs raise funds through donations or in exchange for equity or rewards.
Raising money for your small business might be challenging, especially if you are starting. Qualifying for loans from conventional banks and established lenders is almost impossible. Fortunately, you can access loans from other alternatives. The tips above can help you make the right choice of business financing.