One of the fundamental realities of starting and growing a small business is the need for capital. The more successful your business, the more likely you are to need additional funds to support your growth.
There are various financing types available for businesses – all with their own pros and cons. Let’s take a closer look at how to determine which type of funding could be best for your needs.
Debt Financing vs. Equity Financing
To generate the capital they need, many businesses seek either debt financing or equity financing. Equity financing involves selling a portion of your company’s equity in return for cash. Debt financing, on the other hand, refers to borrowing money.
With debt financing you’ll typically receive a lump sum of borrowed money, and you’ll repay the loan along with interest charges on a monthly basis. While debt financing involves a repayment obligation, it allows you to retain full ownership of your business.
With equity financing, you don’t have to worry about repayment or interest charges, but it involves giving up some of the ownership you have in your business.
Types of Small Business Financing Sources
One of the most important lessons many small businesses learn is that success is often the reason they need more capital. A need for additional capital may arise when you hire employees, add inventory, expand your physical location, or purchase equipment.
Small businesses are vital to the U.S. economy. Because of this, there is a wide variety of financing sources for small businesses, including government programs and loans through commercial banks and lenders. Each are designed to meet different needs, and in many cases you can tailor a solution that fits your unique business situation.
Financing options for small businesses include:
- Business Lines of Credit. One of the most flexible forms of business financing is a business line of credit. It provides a revolving credit line, similar to a credit card, that you can use and pay back down as revenue comes in. A business line of credit is an especially convenient way to finance seasonal business operations.
- SBA Loans. The Small Business Administration provides several different programs designed to assist your small business with needs from less than $25,000 to more than $5 million. These loans can take some extra documentation but can be a good source of financing for specific needs.
- Short-Term Loans. Many businesses use short-term loans to fund seasonal needs for inventory and other expenses. They usually require a personal guarantee and are qualified based on both the business’s credit, and the credit history of the business owner.
- Business Credit Cards. Business owners often find that business credit cards can offer the flexibility they need while providing a convenient way to access and repay funds. Your bank will help you determine the best type of card for your business and will establish a limit that fits your needs. Keep in mind that your credit limit will typically be linked to your business credit score, and as such, a business credit card could be a good way to build your business’s credit.
- Equipment Loans. If your business utilizes specific equipment, it is often useful to finance those items with separate loans. Lenders generally view your equipment as collateral and can specialize in providing funds for your exact purchase.
- Commercial Mortgages. If you are looking to purchase your own warehouse, retail space, or office, rather than leasing, you may find a commercial mortgage is an efficient way to help fund your purchase.
Instead of waiting until you are running short on cash to pay immediate bills, you should review your business’s cash flow trends in detail to help determine the level of funding you need now, versus what you might need in the coming months. You can then approach your lender about financing, and be able to demonstrate exactly how you will use the funds. Developing a cash management plan can help ensure you’ll be able to properly utilize and repay any borrowed funds, and help you determine the best type of financing for your specific situation.
Some considerations to keep in mind with business financing are:
Once your prep work is done, you will have a better sense of which type of business financing might be best for your situation. Careful planning and responsible use of debt is a smart way to ensure your business has the funds it needs to grow and prosper.
Knowing what your options are when looking into business financing will help ease the process when you consult with your business lender to assess your situation. If you’re a business owner in MA or RI who is looking for cash flow and financing guidance, don’t hesitate to contact BankFive today!