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How to Choose the Right Type of Business Financing

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If you have been wondering how to choose the right type of business financing, it is important to start by considering your needs and goals as a small business owner. Small businesses each have their own unique set of challenges and opportunities. As such, there are a wide range of small business financing options available to suit the specific circumstances and different types of businesses.

By taking a top-down approach that carefully considers all small business financing options, you can find the right fit for your particular business needs. Ultimately, some options are better suited to certain enterprises than others, so the key is to choose wisely by selecting funding that truly supports your small business’s growth and future success.

 

 

The Starting Point for Small Business Owners

The first step is to choose between debt and equity financing. With debt financing, you take out a loan from a lender in order to fund your business. This type of financing is convenient because it does not dilute your ownership stake in the company, but it can also be more expensive due to interest payments.

With equity funding, you are seeking financing from venture capitalists by selling shares of your business in order to raise capital. This option can quickly improve your cash flow, but it ultimately means ceding control over part of your business, so it isn’t the best way to raise money if you want to protect your long-term financial interests. Also, it could also mean that you lose some control as investors can impose restrictions on how the business is run.

Once you have made this initial decision, you can then move on to consider other factors such as the type of credit facility, its interest rate, and repayment terms – each of which can have major implications for your overall financial situation. By taking a strategic approach to choosing your financing option, you can ensure that you are making the best choice for your business model, needs and long-term goals.

 

 

The Drawbacks of Traditional Small Business Loans

Demanding Application Process

When seeking a small business loan, one of the biggest challenges applicants face is the extensive paperwork and loan application process. Financial institutions typically base their lending decisions on a number of factors, including the financial health and stability of your company. As such, you will be required to provide detailed documentation related to tax returns, financial statements, and other financial documents, such as accounts receivable and accounts payable information, stretching over several years.

In addition, in most cases you will also need to obtain credit approval in order to get term loans. For those with bruised credit or a limited credit history, this can be a significant barrier to securing the financing you need.

Rigid Terms

With a commercial loan, you’ll need to have a clear plan for how you’ll use the money and how you’ll repay it. The terms of business loans are not flexible. For small businesses that have fluctuating revenues, this may not be the best option, as making the required monthly payment schedule could create new challenges – or be entirely impossible to meet – during a downturn or slow season.

The Consequences of Default

No business loan is without risk, and it is important to carefully weigh the potential consequences of defaulting on a commercial business loan. For one thing, if your loan is secured with valuable assets, you could stand to lose those assets in the event of a default. Additionally, defaulting on a business loan can have a negative impact on your business credit score, as well as your personal credit score in some cases, which could limit your ability to get personal loans, personal lines of credit and credit cards in the future.

 

Business Loan Alternatives

Lines of Credit

One option that may be particularly well suited to many types of small businesses is a line of credit. A business line of credit offers fast, flexible access to cash in case of emergency or unexpected expenses, allowing you to draw on the funds as needed without needing to reapply every time.

Additionally, unlike a traditional business loan, a line of credit typically requires only a smaller initial commitment, making it an ideal choice for smaller businesses who are looking for a more affordable financing option than their business credit card.

Merchant Cash Advance

Merchant cash advance financing is another potential option for businesses looking to access funding in a timely and flexible manner. Unlike short term loans and other forms of traditional lending, which often come with restrictive terms and conditions, cash advances provide businesses with a lump sum of cash up front in exchange for a small percentage of future sales.

This allows entrepreneurs to leverage the growth of their business in order to access critical working capital. Thanks to flexible structures and terms, cash advances make it easier for businesses to adapt their funding arrangements as they grow and change over time.

Equipment Financing

There are many factors to consider when deciding whether or not to use equipment financing for small businesses.

On the one hand, equipment financing can be a valuable tool, helping entrepreneurs to invest in the tools needed to grow their business and increase profitability. This can be especially useful for startups that do not yet have enough working capital or credit history to purchase expensive equipment with cash.

On the other hand, equipment financing tends to carry much higher interest rates than other types of loans, meaning businesses are paying more in interest over time than they would if they had borrowed from a traditional bank. Furthermore, if your equipment doesn’t perform as expected or you are unable to pay back your loan on schedule, you may face stiff financial penalties that could put your entire business at risk.

Invoice Financing

Invoice financing, also known as invoice factoring, involves the use of a third-party lender to help small businesses bridge cash flow gaps by providing funds based on outstanding invoices from clients.

On one hand, invoice financing can help businesses to cover expenses and maintain operations in between payments from clients. This flexibility can be especially important for startups or those that experience seasonal fluctuations in their business cycles. Additionally, the ease with which certain lenders provide invoice financing can make it a very attractive option for some small businesses.

This type of funding often comes at a high cost, often in the form of interest charges or fees paid each month on the outstanding balance. Additionally, some people argue that invoice financing is not always necessary for all small businesses, as many other options exist for keeping cash flow steady during difficult periods.

 

 

Finding the Financing That Meets Your Needs

As small business owners realize, there’s no such thing as free money. However, there are a variety of financing options to choose from when small businesses need some additional cash flow.

It’s important for business owners to carefully weigh the pros and cons of each option, relative to their unique needs and challenges, before making a decision. If you want to explore fast and flexible funding options that can help your business, Merchant Growth can get you up to $500,000 in financing, within 24 hours of approval! Apply today!

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