The way you finance a small business will shape the company you run. That’s why it’s important to carefully consider your options and make well-informed decisions.
The process varies by lender, but generally, you’ll be required to submit income tax returns, a financial statement and your personal credit score.
Term Loans
Whether you need to purchase inventory or expand your business into a second location, small-business term loans are the most straightforward financing option available. They provide a lump sum of cash upfront in exchange for specific borrowing terms, including a repayment schedule and an interest rate.
To be a good candidate for a term loan, you’ll need a solid track record and a high credit score. It’s worth spending a few months getting your personal and business credit in top shape to ensure you qualify.
Lenders will consider both your personal and business credit history when reviewing your application, but they focus on the health of your business. You should also make sure you’re comparing rates and repayment terms to find the best deal. Hidden fees and fluctuating payment schedules can strip businesses of the revenue they need to operate. Avoid lenders with shady websites and an unwillingness to disclose their full loan terms.
Lines of Credit
Similar to a business credit card, a small business line of credit gives you access to a set amount of capital that you can draw on an as-needed basis. You only pay interest on funds you borrow, and amounts repaid during the “draw period” can be re-borrowed, giving you greater flexibility than a term loan.
Unsecured lines of credit are available from a wide range of lenders, including online lenders, banks and credit unions. Lenders will look at your personal credit score and history, as well as the revenue of your business to determine eligibility.
Responsible lenders will also ask to see documents such as business tax returns, financial statements and a business plan. They may also require a security interest in business assets to secure the line of credit. These requirements make a line of credit more difficult to obtain than a traditional loan. Nonetheless, it can be a useful tool for a small business to have in case of emergency.
Credit Cards
Credit cards are a great option for business owners who want to keep their personal and business expenses separate, or if they don’t qualify for a traditional bank loan due to insufficient revenue or time in business. Additionally, credit card issuers typically report payment activity to commercial credit bureaus and can help a business establish a strong business credit history.
Business credit cards may also come with benefits like travel arrangement protection, vendor discounts, cash back and rewards points. But business owners should be careful to not overspend, as overusing a credit card limit can negatively impact your company’s credit utilization ratio.
Most small business credit cards are unsecured, so the approval process typically requires a personal guarantee from the owner. This could have a negative effect on your personal credit score, but some card issuers offer cards designed for a specific range of personal credit scores so you can minimize this impact. Additionally, some cards charge annual fees while others don’t.
Crowdfunding
Crowdfunding is another way to raise business capital, especially if your small business meets certain criteria. While it takes diligent work, knowledge of alternative funding options and awareness of regulations, crowdfunding can give you the boost you need to move your business forward.
The process involves people, often strangers, contributing money to your business. They might receive special incentives, such as a T-shirt or your product at a discounted rate, depending on how much they donate to your campaign. Others might also receive equity stakes, similar to a traditional investment, in exchange for their contributions. This is known as equity-based crowdfunding. Both types of crowdfunding campaigns run on specialized platforms, where you can present your company’s case to potential investors. They are not for every business, and they require an extensive promotional effort to reach your funding goal in time. The process can be lengthy, and the results are not guaranteed. It’s important to consider the pros and cons of each option.