How to Choose the Right Type of Financing for Your Small Business

Most small business owners will need financing at some point. But access to capital is tricky if you’re not sure exactly what you’re looking for. As an entrepreneur, you may be an expert on your business objectives, but not necessarily an expert on small business financing options. And while the banks may be experts on financing options, they’re certainly not experts on your business model.

Business owners must consider convenience, interest rates, payment schedules, personal and business accountability for debt, and approval processes for different types of financing. So when thinking about small business financing, where do you start?

Let’s examine the most common financing options, and also a solution to bypass traditional banks altogether.

Small Business Credit Cards

You may have already received numerous offers for a business credit card. It’s a popular option for short term financing goals since it’s easier to qualify for than a small business loan. Like a consumer credit card, it carries an interest rate if the balance is not paid by the end of the billing cycle.

There are many advantages to business credit cards. They provide a convenient way to make purchases or payments. They often carry incentives or rewards. Using a business credit card responsibly will help build business credit, which will help a company qualify for more significant (and less expensive) capital later on.

There are also some drawbacks if business credit cards are not managed properly. First, they can be expensive if a balance goes unpaid. Business credit cards typically carry much higher interest rates than loans. Some cards require personal legal liability, meaning a business owner can be responsible for unpaid debt. Interest rates can fluctuate, and you’re also introducing some security risk if employees have access to business credit cards. If you can manage these risk factors, the business credit card is an excellent option for access to capital.

Lines of Credit

Much like a small business credit card, a line of credit provides access to funds up to a certain limit. It comes with a variable interest rate and monthly payments. And like a credit card, this type of financing can be useful to a business with variable spending patterns. The business only needs to pay interest on the amount it spends.

Unlike business credit cards, lines of credit usually do not offer a grace period for interest-free payments. And while the interest rates are typically lower and limits are usually higher, lines of credit often require both a business and personal guarantee.

Term Loans

The term loan is a lump sum that will be repaid over a fixed period of time. The business does receive flexibility in how it can spend the loan, but it is required to repay the entire lump sum, plus interest, according to a predetermined payment schedule.

Because of the flexibility in spending, term loans are used for a variety of needs. Examples include everyday expenses, new equipment, business expansion, etc.

SBA Loans

We’ll save the details on the specific types of Small Business Association (SBA) loan programs and stick with the broad strokes. These are government-backed loans that come with comparatively low interest rates and fees. The downside is a lengthy application process and a significant delay (up to three months) in the approval process. It’s a viable option if you won’t need the money for some time.

Alternative Financing for Small Business

The options above are the most common types of small business financing, but there are other avenues that may be appropriate for your business. For instance, there is specialized financing for commercial real estate and industrial equipment or technology.

There are also options for minority-owned businesses, local funding or grants, franchise loans, or healthcare practices.

Bypassing Traditional Banks

If it feels like you’re trying to juggle between interest rates, flexibility, timeliness, and risk of not receiving approval—it’s because you are!

Financing for small businesses is difficult because it requires meticulous financial record-keeping and planning. It relies on banks, government agencies, or investors to understand your unique business.

Some business owners have navigated the minefield, and some have fallen victim to delays, cash flow issues, data gaps in loan applications, and debt due to high interest rates. But finally, there are easier ways to choose.

Connect a modern banking platform to all of your financial systems. That technology can handle the data and insights, saving you from scrambling for bits and pieces to complete a loan application (which doesn’t always capture the opportunity for your business). Not only can you pull all of your business financials into one place, but you can also access recommendations for different types of capital based on YOUR business data. The result is fast, frictionless access to financing that will help your small business seize opportunities quickly.

While the number of financing options can feel overwhelming, the good news is that business owners are no longer on their own when it comes to financing decisions.

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