One of the greatest challenges small business owners face is having the necessary capital to succeed. Unlike large corporations, they lack the option of selling stocks or bonds to raise funds. This can place them at a competitive disadvantage: for example, it can limit access to higher volume purchasing or restrict the ability to negotiate more favorable long-term vendor contracts.
A lack of cash reserves also makes it harder to compete for talent against larger companies that can provide better employee benefits and maintain sizable marketing budgets.
Wondering how to finance a new small business or simply want to jump start your next growth period? Here are three sources to consider:
Business lines of credit: This is a form of revolving credit that allows you to flexibly withdraw money as needed, as opposed to a lump-sum term loan. With a line of credit, you only pay interest on the cash you draw; the unused money doesn’t accrue interest. Like any standard corporate loan, a business line of credit can be either unsecured (usually at a higher interest rate) or secured with collateral.
Lenders may structure business lines of credit in a variety of ways, but there typically are distinct draw and repayment periods. During the draw period – generally lasting two to five years – you can borrow money from the line of credit up to a predetermined limit, with that money accruing interest. As noted, unused money is interest-free, but fees may apply to keep the line open.
You can pay back any funds you borrowed while the draw remains open in order to replenish the available capital; if not, repayment begins at the close of the period, and the ability to borrow against that credit line ends.
Repayment is made in installments. Since the interest rates on a business line of credit can be variable, they might change throughout the life of the credit line.
Term loans: Business term loans are a traditional funding option. The funds are delivered in a lump sum, and repayment is made in equal monthly installments over time. Most term loans come with payback periods of five or more years.
Borrowers can expect to provide information about their time in business, credit score and annual revenue. Companies with a solid history will generally be eligible for the best rates; those with poor credit or are a startup business will likely be looking at somewhat higher monthly payments. This type of financing often requires collateral.
Unless you are looking for a specific use loan product like a business auto loan, you can generally use a term loan in a wide variety of ways to expand your business.
The bank may ask you to identify a purpose for the financing to evaluate the risk of lending to your business when you submit the application. If circumstances cause your financial needs to change, so long as you make your on-time payments, the bank is unlikely to interfere. This flexibility is perhaps one of the biggest advantages.
Business credit cards: If your credit is good, business cards generally come with sufficient spending limits and earn cashback on company purchases. In addition, you are easily able to track business spending, provide employee cards and take advantage of business-related perks. Best of all, judicious usage helps your business build a solid credit history.
Business credit cards are another form of revolving credit. They allow you to make purchases up to a predetermined credit limit and pay back over time, with interest on any remaining balances. Just as with your personal cards, there are no limits on how you can use the funds.
You can also choose to let your team members make purchases, set spending limits and give them the flexibility to buy without seeing other users’ transactions or card details. For businesses that have multiple employees making spending decisions in specific areas, this is an ideal choice.
It’s difficult enough to get a small business up and running. You’ve got to identify your niche, find the right vendors and manage costs…among other challenges. Keeping it all properly funded is vital. It pays to know your options and to work with financial pros who can help you make the choice that best suits your needs.
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