Everything You Need to Know About Business Funding
One of the top rules of running a small business is to always know how much business funding you will need. However, business owners run into problems when they are low on working capital and haven’t set up any financing options.
Many business owners are then surprised when they apply for a business loan, business line of credit, or other loan options with a commercial or local bank only to find how tedious the process is.
Let’s cover all the financing options available for small businesses for all types of business funding such as traditional banks, angel investors, venture capitalists, merchant cash advances, SBA loans, alternative lenders, and more so that you are aware of the various business financing options.
What Do Banks and Credit Unions Look at to Approve Business Funding
The first thing a business owner needs to know is that banks and credit unions provide 2 types of business financing. A business term loan and a business line of credit.
A business loan is a set amount of small business funding that is paid back over a long period of time. Typically 2-5 years. Business term loans are used to finance inventory, purchase large equipment, or to start a business.
A business line of credit is a preapproved set amount of money that a business has access to for working capital. A business credit line is helpful to help even out cash flow so that fixed expenses like payroll, rent, etc. can be made on time. A business line of credit also helps for small business funding when there is already growth in your business.
Bank and Credit Union Application Process
A traditional bank application process is notoriously very tedious to fill out because it will require a lot of business and personal information. That information will require a lot of time to get together. As a result, be prepared when filling out the loan application to budget a solid week of work on the application regardless if you or someone else fills out the application.
Banks and Credit Unions Require Collateral
Most business owners believe that banks will require a great business plan to get business funding but the reality is that traditional banks want all lines of credit and business term loans to be backed up with collateral. They may not even look at your business plan. Collateral is an easily sellable personal or business assets that the bank can sell should you default on the loan. Bank will not provide any business funding without it.
Personal Guarantee and Personal Credit Scores
All banks and Credit Unions will require loans to have a personal guarantee from all partners. If one of the things you are pledging in collateral is the equity of your home then your spouse will also be required to sign all loan documents. In addition to collateral, all banks will require at least a 680 credit score.
If you have a business partner as well, she/he/they will also be required to sign the loan documents.
Strong Business Financials
Banks and Credit Unions are going to look at your tax returns and various accounting reports to determine how strong your business is. Many small business owners believe they have a very strong business only to find out from the bank underwriters that the bank doesn’t see it the same way you do.
Going through a bank loan underwriting process is a good learning experience because you will see and learn about parts of your business that financial experts consider an issue. You might also be shocked if approved how much the loan amount you are actually approved for versus what you think you should be approved for.
Alternative Lenders Like Financing Solutions Can Be Cost-Effective Business Funding
Alternative lenders are financial institutions that use private investor funds instead of government funds and therefore can be easier to be approved for business loans or business lines of credit.
Financing Solutions is an alternative lender which means that it does not have to require collateral or personal guarantees like a bank does. As a result, Financing Solutions can offer small businesses and nonprofits with at least $400,000 per year in revenue a business line of credit that is much easier to get in place.
A business Line of Credit is a good type of funding to address short term or working capital when cash flow is temporarily down. It’s like a short term loan but less expensive.
2-Minute Application Process With No Paperwork
Financing Solutions Line of Credit Application is easier to get in place than a bank loan. Business owners want to know if you qualify quickly and for how much, without having to put in a lot of effort. Because Financing Solutions is owned by two serial entrepreneurs they know how valuable your time is so the FS loan application process was purposely designed to be easy to fill out.
After filling out the application you will receive a written offer letter emailed to you. There is no obligation and no credit report done for offer letters. It is only after you decide that you want to move forward when a credit report will be run.
If you decide you want to move forward with the business line of credit after receiving the offer letter then we will request a recent tax return, 4 months of bank statements, A driver’s license, and a voided check.
Your business line of credit will then be set up in our secured customer web portal. You can request business funding at any time as well as see your balance and request to pay off the lines. Everything is done through wires which we will initiate when requested.
No collateral or personal guarantees
Financing Solutions makes approval decisions based on our long history of being able to determine if a business repay a business line of credit. Therefore, there is no collateral or personal guarantees required. We can tell based on factors such as your industry, revenue, profits, debt, and other factors on your tax return if you are able to handle a credit line and the amount.
Costs to set up a business credit line
Unlike a bank loan, A Financing Solutions business line of credit costs nothing to set up and nothing until used making it a great back up plan. In many cases, a Financing Solutions credit line is cheaper than a bank credit line.
The repayment terms are simple. If you use your line of credit there is a small weekly payment that begins to pay back the line. You can pay your credit line back in full at any time you like and there is no prepayment penalty.
SBA Loans (Small Business Administration)
SBA Loans are often a good option for certain businesses but what is often misunderstood by business owners is that the Small Business Administration doesn’t actually issue the business loan or business line of credit. The SBA approves certain lenders who then will approve the loan based on a set of defined criteria. That criteria is often easier to qualify for than if you went only with your bank.
Costs for an SBA loan
The costs for an SBA loan are more similar to a bank term loan. There will be an application fee and points paid once the loan is issued and you will be charged an interest rate that will typically be a few points above the prime rate. An SBA loan is typically more expensive than a bank loan because your business will be considered a higher risk.
Benefits of an SBA Loan
The benefit of applying for an SBA loan (u.s. small business administration ) is that you stand a great chance of being approved for a larger amount of money. An SBA loan may also not require as much collateral as a bank loan.
Just be prepared that an SBA loan has a much more tedious application process and will take a few months to get any business loan in place.
Angel Investors for Business Funding
Angel Investors are private investors who will provide capital typically in exchange for a part of your company. Many people have seen the TV show Shark Tank and those investors on the show are Angel Investors.
The difference between an Angel Investor versus a Venture Capitalist is based on the amount of money invested. Angel Investors will often pledge a smaller amount from $10,000 to $500,000.
Angel Investors are found through family/friends as well as through Angel Investor Groups. Getting Angel Investors is not an easy or inexpensive task. There are legal contracts that must be drawn up and you will be giving away a part of your company.
Misunderstanding of Angel Investors
There are two major misunderstandings when it comes to Angel funding.
The first misunderstanding is that Angel Funders make money when your company makes money. Angel Investors make money when you sell your company. There needs to be a liquidity event so that the Angel Investor gets paid out.
The second misunderstanding is that Angel Investors do not provide business funding for many lifestyle businesses. Lifestyle businesses are businesses that have little chance of getting above $10 million in yearly revenue. Angel Investors do not provide business loans for working capital. They are purchasing an interest in your company because they believe someone else will buy your company at a much higher amount later.
Angel Investors are typically looking for businesses that will sell for 10 times what the yearly revenue is.
Venture Capitalist for Business Funding
Venture capitalists are professional investors who will purchase an interest in your company. They do not provide loans or lines of credit for business funding. Similar to an Angel Investor, Venture Capitalists (VC) are looking for a liquidity event involving the sale of your business or a public offering. That is the reason they are willing to invest in your company.
Is Using Credit Cards for Business Funding a Good Idea?
Credit cards have a cash advance capability that businesses can use for business funding. It can act as a line of credit in essence however a cash advance on a credit card is very expensive. What most people also don’t know is that interest on a cash advance starts from the day you borrow the money.
In addition, credit cards often have a much lower amount of money that can be used as a cash advance and it is very hard to be approved for multiple credit cards.
The other issue about using the cash advance feature of a business credit card is that all business credit card balances are reported to credit agencies and therefore carrying balances will affect your personal credit score.
Having a good credit score, typically about 650 is really important for any business owner.
PPP Loan Programs Due to Covid-19
As of this writing, there is still money available to businesses through the Payroll Protection Program (PPP) to help businesses affected by Covid-19. If 75% of the business funds are used for payroll then the loan does not have to be paid back. In essence, this business funding then becomes a small business grant instead of income.
If your business has already used the PPP then you will not be qualified to get another PPP business loan.
Of note, the lump sum offered by the government does not act as a business line of credit. A business line of credit could be a better option because you are only required to pay the credit line back if you actually use the funds. Thus a credit line from a company like Financing Solutions might be a better option because it costs nothing when not being used.
Pro’s and Cons of Borrowing Money from Friends and Family
Friends and family loans can be a small business funding option. However, every friend and family relationship is different and only you can decide if it is a good idea.
Borrowing money from friends or family can often be a cheap and fast alternative to a bank loan or an alternative lender. If used for a very short period of time or used in a way that the friend or family gets something worthwhile, it can work out well for both parties.
The key to borrowing money from friends and family is can they really afford it and what is the personal price you are going to pay for asking them. You might think they are wealthy but the reality might be a bit different then what you perceive.
Also, business borrowing is a lot different than personal borrowing. Borrowing money for working capital could involve tens of thousands of dollars and that type of figure is often a shock to someone who doesn’t own a business. Often times the person loaning the money will really question your ability to run a business because you asked for the business loan and that in itself can causes problems.
Invoice Factoring May Be a Good Long Term Solution for Business Funding
Invoice Factoring is when a Factoring company will go into a long term contract with your business to advance you funds against approved invoices. You will show the Factor your invoice and if approved, they will advance you up to 90% of the invoice. Your customers will then pay the Factor. You can’t Factor just one invoice. You are required to go into a contract with a Factor and setting up that contract can take 30-60 days.
The perk of such an arrangement is that the business funding a Factor provides will often allow you to have plenty of working capital. Also, if you have bad credit, a Factor may not care because the Factor will be paid from your clients and not you.
The disadvantage is that your clients will know you use Invoice Factoring and may not like it. Some may even write it into their contract that invoices can not be Factored. Factors may always refuse to Factor certain invoices if your clients have bad credit.
Factoring can be very expensive and once you get used to the process you might find it hard to move away from the convenience. The long term costs of using Invoice Factoring is the true cost that oftentimes is overlooked.
Crowdfunding for Business Funding is Challenging
Crowdfunding is when you get small amounts of money from a large number of people. It is often used to start companies and usually, those companies have a vision or service that is really appealing for social reasons.
Crowdfunding is not a good financing option for a going concern business.
You are prepared for the ups and downs of cash flow
This is something every business experiences at one time or another. Without small business funding, you are in danger of losing your business. As a matter of fact, the number one reason that more than 50 percent of small businesses fail within six years is that they simply run out of cash. Don’t let this happen to you. Remember that long-range planning is accomplished with continuous bursts of short term business financing.
You Can Handle Emergencies
Disaster, misfortune, and out of the blue occurrences, are sure to happen to your business at some time. This might include a major storm, the loss of your biggest client or even being the victim of cybercriminals. When it comes to these types of events, it’s not a question of if it will happen but when. With an emergency business loan, you are ready for anything.
You Can Take Advantage of New Opportunities
If your business is not growing, it is failing. Growth often requires finding new customers, expanding your product line, or locating a new revenue stream. For many companies, when opportunity knocks, they must first pull back the chain, unhook the locks and turn off the alarm system. By then, the opportunity is gone. Excuses are abundant, opportunities are not. When your fast business loan is already in place, you can seize every good opening to take your company to the next level. This is how you beat the competition. Coming in second just makes you the first loser.
You Can Make Sure You Always Make Payroll
This sends a strong message to your employees that you are a stable company. In addition, you don’t get into trouble with the IRS or the state by paying your staff late. In fact, many for profit and not for profit businesses are not aware that it is actually illegal to pay your employees late and you can get into a lot of trouble if this becomes a recurring problem. Also, not paying your employees on time makes them cranky and unproductive. They may be disrespectful to customers and prone to the kind of mistakes that can affect product quality. Your people are your company’s greatest asset. With quick business funding, you can ensure their devotion and give them the confidence that this situation will never happen.
You Don’t Have to Put Your Personal Assets Into The Business
It’s tough enough to separate your personal credit history from your business credit history. Don’t compound the problem by mixing up funds as well. When you have to take out an instant business loan, the bank will use your personal credit score to make their funding decision. You may only be eligible for a home equity line of credit, forcing you to put your own residence on the line as collateral. If you have a business line of credit, you can avoid this. It lets you have a continuous supply of cash to use so you won’t have to dip into your own money to fund your business.
You Don’t Get Distracted From Your Work to Have to Find Financing. Be Proactive From the Start
If you do not prepare your business today, you might as well forget about tomorrow. As a small business owner, your primary focus must be only those tasks that relate to your growth and survival. It’s crucial that you delegate the rest. This is almost impossible to do if your survival is in jeopardy because you keep running out of money. That means your focus is always on financing and you are in perpetual panic mode. When you know that you have small business funding already in line, you can rest easy and get back to business.
Getting Instant Business Funding like a Line of Credit When Times are Good
When you are in distress is the worst time to seek a business bank loan. Banks are reluctant to grant funding to small businesses on a normal day. Research shows that big banks fund only about 25 percent of the small business loan applications they receive. They have so many rules and regulations about collateral, credit scores, and financial statements that it’s impossible for most small businesses to qualify. Add financial woes to the equation and you can forget about it. By going to an alternative financing company, you can get easier terms, fewer fees, and a faster response. Do this now so that when the need for fast business cash surfaces, you can rise to the occasion.
Benefits of Being a Small Business
Things are not easy for the small business owner. Sometimes, it may seem like the whole world is out to get you. But fear not, intrepid entrepreneur. Of course, your goal is to grow but you should also be aware that there are numerous benefits to being exactly where you are.
For one thing, technology makes it easier than ever to compete, even on a global scale. You can use online resources to communicate, sell, buy, and grow. There are apps and platforms that let you do everything from managing front end tasks to starting a customer loyalty program. Now you can accept payments from customers in any form as well as engage your audience directly on social media and improve your website to make it work for you. This can make your business more efficient and free up your time to concentrate on the important stuff. Best of all, new programs pop up all the time. As a small business, you have the speed and agility to take advantage of these tools quicker than the big guys.
Advice and Mentorship
Additionally, you have access to advice and mentorship from those who have come before you. The world is teeming with successful business people eager to share their knowledge. You can find blogs, videos, podcasts, and presentations from some of the top minds in business, all with the click of a button. They offer tips and insight into what they did right and how you can learn from their mistakes. This means you don’t have to recreate the wheel. You now get to take all this information and run with it to surpass them and make your business the best it can be.
Support From Business Owner Community
Getting support from your community is another benefit. Studies show that more than 90 percent of U.S. businesses are small businesses. Most people either currently work for, used to, or knows someone who works for a small business. You help create jobs in your surrounding area. As a result, they are happy to help you succeed. Outsourcing, customer service automation, and long wait times have many people ditching the large chains and turning to small businesses for satisfaction. Take advantage of the fact that you are more familiar with local issues and concerns. Get involved in your community by planning, attending, and sponsoring events. Customers will reward you tenfold.
Another benefit is that you get out what you put in. Whether you succeed or fail is completely up to you. You decide how many hours you will work, who you will hire, and where your vision will take you. Middle management bureaucracy, indistinct goals, and office politics are a thing of the past. All your hard work and dedication directly relates to your passion. There may also be the additional advantage of knowing that you are helping your employees follow their dreams as well.
Also, having big companies to compete against keeps you on your toes. To get to the top, you must push yourself, be innovative, and do the things they can’t. This includes providing a personalized experience for each customer, adapting to economic shifts, and capitalizing on trends as they happen.
New Financing Options
You also have numerous outlets for fast business financing. There is now an abundance of financing companies that exist just to help the small business owner. While banks continue to increase their restrictions, these companies design their services with the small business owner in mind. They understand your challenges and realize that your processes are different than the mega-corporations so they are willing to work with you.
Winning in business is not a part-time endeavor. It requires your full-time dedication. That’s how you go from good to great. Getting quick business funding from Financing Solutions with their line of credit is a good way to get where you are going. Every business owner should have a cash back up plan.