You might have initially financed your business with your own money or loans from family and friends, but at some point in your business cycle you will need business financing for growth and stability.
Be Prepared and Get Support
Business financing options come in many shapes and sizes depending on your needs. As a business owner, you’ll want to ask yourself:
- How much money you’re looking for, what’s its purpose?
- How soon do you need it, and what your timeframe is for repaying it?
Lenders will want to know details about your financial standing for your business and for you as an individual. Important steps to take toward funding your company are being prepared with your business plan, accurate financial records, and taking the time to come up with an engaging and direct pitch about your business.
Resources that may help you are:
- A Certified Public Accountant (CPA)
- A Business Mentor, such as leveraging organizations like SCORE and the SBA.
- An experienced Business Banker
Business Financing Options
Here is a summary of business financing options and alternatives to consider. Not all may apply to your business or situation so think carefully before you apply or pursue any of these. Consult with your CPA or business mentor to weigh your options.
Traditional Financing
Line of Credit
A line of credit is a fixed amount of money on which you can draw, paying interest on the amount you borrow. When you establish a business line of credit, it is available anytime you need it or an emergency arises. Interest rates tend to be variable and the use of the funds is meant for short-term financing (less than 12 months.)
Short-Term Loan
Most banks do not offer short-term loans, but are a common product from alternative lenders because they are scheduled to be paid back in a year or less. This can be useful when you need working capital quickly for things such as onetime costs.
Installment Loans
Installment loans provide a lump sum of money (typically referred to as a term loan) to a borrower which is then repaid to the lender at regular intervals until the principal plus interest is paid off. Many installment loans have fixed Interest rates, and a fixed payment amount. Commonly used to finance the purchase of real estate, company vehicles, or fixed-assets.
Equipment Financing
Equipment financing is a loan to purchase the equipment your business needs to operate. Different from other types of loans, equipment financing relies on the equipment itself as collateral, instead of your personal credit or annual revenue, which can allow for lower rates and more application approvals.
Business Credit Card
Once approved, a business credit card can provide a quick way to access cash or make purchases, while building business credit and also oftentimes earning rewards. It’s important to keep personal and business expenses separate, so having a credit card specific for your business will help with accounting come year end. Be mindful of the balance accrued and ensure your payments get in on time because high interest rates and fees on cash advances or late payments can make it easy for extra charges to add up.
Alternative Financing
SBA Loans
A variety of loan programs are available through The U.S. Small Business Administration (SBA) to assist small businesses. The SBA offers loan guarantees and establishes guidelines for the loans, so there are specific eligibility requirements which vary depending on the type of loan your business is applying for. Benefits of an SBA loan are larger loan amounts, lower interest rates, longer repayment times, and more flexibility. The SBA doesn’t act as a lender itself, rather an SBA preferred lender, like Home Bank of California, helps process and manage those loans.
SBA Loan Education
Check out the Home Bank of California SBA Education series on YouTube.
Grants
Often very competitive and difficult to acquire, grants are incredibly valuable because they are awarded, not loaned. The U.S. Small Business Administration (SBA) offers grants through the Small Business Innovation Research and Small Business Technology Transfer programs.
Crowdfunding
Crowdfunding is a way of raising funds, usually through an online platform. These funds come from the support of backers, who are typically individuals. Options can differ from being a straight donation/gift or you can offer a reward for their contribution like an early version of your product, a voucher for your service or an exclusive experience.
Make sure to research your options as there are fees involved, possible tax obligations, and some have an “all-or-nothing” approach where you don’t receive your funds unless you meet your target goal.
Peer-to-Peer Lending
Peer-to-Peer lending is when individual people borrow and lend money to and from one another. This type of social lending can be in the form of loans, crowdfunding, or angel investments. Online platforms are available to provide insight into different industries, connect you with investors or a community of like-minded individuals interested in investing. Usually best for established businesses that are looking to grow.
Venture Capital
Usually an exchange of cash in return for shares or percentage of ownership in your company, venture capitalists sometimes look to obtain board positions or take on managerial roles and be involved in the company’s decision-making process. Whether individuals or organizations, venture capitalists are looking for the largest returns, so they tend to be attracted to businesses that have high growth potential.
Explore Your Financing Options
Alternative lending can offer advantages for small businesses where traditional banks fall short, just make sure you know all the advantages and disadvantages of your alternative lending option before making a decision.
Check out what we have to offer your business today and contact us for more information.
