5 Options for Financing a Small Business

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Most small businesses usually collapse due to a lack of finances. However, you can grow your business, enhance your inventory, employ new workers, and improve your sales with proper funding. On the other hand, inadequate funding leads to various business inconveniences and even failures. Fortunately, small business owners have a lot of funding solutions if they know where to get them. Listed below are five options for financing a small business.

Community Development Finance Institutions

There are various CDFIs (non-profit community development finance institutions) all over the country offering finances to small businesses and microbusinesses at reasonable terms. They aim to support small businesses that experience challenges growing and acquiring capital to start their enterprise.

Most lenders search for a specific credit score, disqualifying most start-up businesses. And although CDFIs also consider credit scores, businesses with low credit scores may still be eligible to receive CDFIs. CDFIs look at small businesses that have been fiscally responsible and acknowledge that certain instances can happen to responsible individuals and business owners. They try to analyze the cause of the various circumstances and whether they can qualify for a loan. If the borrower can adequately explain and justify such circumstances, they can qualify for a loan. Additionally, CDFI lenders do not require a lot of collateral like most banks.

SBA Loan

Obtaining a typical bank loan can be very challenging, specifically for small businesses. SBA (Small Business Administration loan) is another way to acquire a loan rather than going to the bank. The bank still offers the loan; however, from the lender’s view, SBA approves the loan and supports it through an SBA loan guarantee. If your business is unable to pay the loan back, the government will pay the lender back a certain percentage of the loan (as described in the loan guarantee), but you will still be responsible to repay the lender. Loan servicing software platforms can be beneficial for determining your loan status and keeping you organized.

With SBA, you can only borrow as much as $5.5 million. You also need to understand that you should pass specific criteria to qualify, such as a profitable USA-based enterprise, an excellent individual credit score, and the minor business criteria of SBA. There are multiple types of SBA loans like 504 loans, 7(a) loans, and microloans.

Venture Capitalist

venture capitalist is an individual who offers a financial investment in return for some ownership, or equity, in your business. Therefore, venture capitalists aim at profitable companies, investing large amounts into more promising businesses.

Be aware that the procedure of acquiring a venture capitalist may be a draining process, as the venture capitalist effectively analyzes your business to determine if your departments are strong, if competitive advantage is existent, and if your business has growth potential.. Venture capitalists do invest in high-risk businesses, but you still need to ensure that all business operations are running as smoothly as possible, as venture capitalists look to invest in businesses that are promising of high and rapid growth.

If a venture capitalist provides you with a financing opportunity, it is imperative to discuss the terms and conditions with them, such as ownership percentage, funding amount, and funding use..

Partner Financing

Partner financing consists of a different business owner in your industry financing your business operations or business growth in exchange for access to varying elements of your business, such as your employees, your products, or your distribution rights.. Partner financing is adequate because the company willing to collaborate with you is usually a large business in the same industry. If they are not in your industry, they may be at least interested in your enterprise. Nevertheless, partner financing will enable you to leverage your resources while growing your business.

Invoice Financing

In invoice financing, a service provider gives you the money upfront based on your outstanding accounts receivable; then, you repay the provider after the consumer pays the bills. Invoice financing ensures that your enterprise has the adequate cash flow required for the daily running of your business without having to indefinitely wait for your customers to settle the outstanding invoices. Such cash advances enable your company to fill the pay gap between payments and also ensure that your business can begin new projects more quickly.

The Bottom Line

Finding capital for your small business can be a challenging task that involves many processes and, potentially, many disappointments. However, considering practical financing opportunities like those listed above can enable you to obtain financing for your business. Just keep a watchful eye on your business’s revenue and expenses and employ strategic financial planning to avoid any unavoidable business failures.

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