Businesses are built with hard work, determination and a significant investment. Capital is a pre
... -requisite to starting a business from scratch and...Businesses are built with hard work, determination and a significant investment. Capital is a pre-requisite to starting a business from scratch and running it until it reaches break even. Entrepreneurs may still want to pump funds into their entities after they start generating profits to achieve growth and milestones. Thus, seed funding, working capital and growth funds are essential for developing a venture over its lifetime. It makes entrepreneurs seek financing at different stages of the business lifecycle.
While taking out a small business loan is the easiest option, there are many other alternatives that new entrepreneurs can access. In many cases, banks are skeptical about lending money to amateurs, which can become an impediment to realizing their dreams. So, here is a list of financing options that small business owners can utilize. These allow them to get the desired funds at the right time and grow effectively.
1. SBA-Guaranteed Loan Program
Start-ups and small businesses have a high failure rate because of financial issues. It makes them highly vulnerable entities but their survival is important for the local economy. Thus, the United States Small Business Administration (SBA) provides assistance in securing financing. They have partnered with money lenders to help small businesses to get loans with hassles. It reduces risk because the rates and fees of these loans are similar to those of non-guaranteed loans.
Other advantages of SBA-guaranteed loans include lower down payment and flexible overhead requirements. In some cases, the borrower does not even need to provide collateral. New entrepreneurs wishing to purchase a business for sale United States can also leverage this financing option. However, the entity must be creditworthy and should be legally registered and operational.
2. Small Business Loans from Banks
Banks offer small businesses financing with a lower interest rate and favorable terms. However, securing this funding can be challenging because of several eligibility criteria and paperwork. Small businesses should have a credit score of 680 for a bank loan and 630 for accessing a business line of credit or equipment financing. Besides the credit score, banks will also evaluate the business plan, debit-to-income ratio of the business.
Secured bank loans require collateral that the bank can seize in case of failure to repay the debt. In other cases, they can be personal guarantees, wherein the borrower will have to repay the debt with personal funds. Eligibility criteria for loans may require minimum annual revenue or years of establishment.
3. Venture Capital from Investors
Start-ups can approach angel investors, and individuals who have purchased a United States business for sale can seek funding from venture capital firms. These investments are offered in exchange for an ownership share in the business and make the investor actively participate in the decision-making process. Entrepreneurs must choose reputed firms to pitch their business plans.
Usually, investors pick businesses with high growth potential and significant equity share. They evaluate the viability of the business and conduct due diligence to determine its financial standing. After the investment is finalized, both parties agree to the terms and conditions of the investment and financing is provided to the borrower.
4. Online Loans for Small Businesses
With banks making it difficult to access loans, many entrepreneurs seek funds online to expand into new markets. It has become a popular source of financing among businesses with a low credit score and high-risk applications. The eligibility criteria for accessing these loans are less stringent, and the loan amount can be accessed within one to two days.
The common types of online loans offered by lenders include merchant cash advances with a five-year or less repayment term. These loans are perfect for entrepreneurs who want to acquire businesses for sale in the United States, are struggling because of negative cash flow or need emergency funding to stay afloat.
5. Community-Based Lending Options
Community-based loans can be accessed by small businesses operating in specific communities that are dealing with financial problems or are owned by minorities. The lenders include banks, credit unions and venture capital firms and are certified by Community Development Financial Institutions (CDFIs) or Minority Depository Institutions (MDIs).
CDFIs are only focused on serving small businesses in certain geographical areas inhabited by low-income groups or minority community members. They also provide assistance with education and training in these communities, offer relaxed eligibility requirements, and even provide mentoring services.
6. Small Business Grants
Any start-up or business for sale in the United States that a driven individual has acquired can use small business grants for development. These are not to be repaid and are usually offered by government institutions and non-profit organizations. Both federal and state governments offer these grants to small businesses.
Federal government grants are accessible to businesses operating in research and development for technology innovation and scientific research. Rural businesses can secure the Rural Business Development Grant program, and the U.S. Economic Development Administration offers financial and technical support to small businesses in states and regions. Small businesses can also access various other grants for free funding.
7. Crowdfund Your Small Business
Crowdfunding also takes place online, but it involves a large number of lenders. These people are not seasoned investors or wealthy individuals. They invest a small amount in a business because they like the product or the idea and get a gift in return. Sometimes the business owner offers free product samples for a few months or the name of the lenders in the credits in exchange for the investment.
Entrepreneurs find it easy to secure funds through crowdfunding because there are no eligibility criteria and they do not have to offer equity ownership to the lenders. They must create a crowdfunding pitch for the business and generate funds without repaying the lenders and negotiating lending terms.
8. Business Credit Cards
Another way to get funding for the business is to use a business credit card to pay the bills and cover costs. It can be easily acquired through banks with a credit score of 670 or more. It does not require the business to have been in operation for several years or be registered. The repayment has to be made within 21 days after the billing cycle, and the APR can range from 14% to 28%. Many business credit cards offer rewards and cash back to owners. However, they incur an annual fee and the loan amount that can be accessed is much lower than a bank loan.
Wrapping Up
Finance is the most significant aspect of business because it helps grow and develop. Insufficient funds lead to instability and the inability of the business to pay its bills, which leads to financial distress and bankruptcy. Small businesses must use the financing options to survive competition and stay afloat.
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