Do you have a cashflow deficit that you are looking to bridge with business financing? Is your business planning an expansion that needs an extra boost of capital?
Choosing the most suitable financing option is one of the most important but difficult business decisions that business owners will need to make. There are many different business financing options out there, but not all of them will meet your business needs in a cost-effective way.
As a starting point, you need to have a valid reason why you want to secure finance for your business. There are a large number of short term and long-term business financing options available, offered by online lenders, banks, and other financial institutions, and each is designed to serve a unique purpose.
In this post, you will find 7 different business financing options for both small and medium businesses. Some of them may be relevant to your business and some may not. We hope to help you to make an educated decision when choosing the business financing option that suits your business the most.
1. Bank Loan
A bank loan is still one of the most popular business financing options. However, since the global financial crisis in 2008, lending standards have become more restrictive. Many banks offer loans to growing businesses at affordable prices, but those business loans are highly regulated and much more difficult to secure. Furthermore, the lengthy bank loan approval process makes it difficult for small businesses to get accepted, hence it is not an assured method of business financing. However, established and strong businesses should try this avenue as it is competitive and there are a range of regulations to protect the business.
With this business finance option, businesses “sell” their receivables to a financial institution that will advance them the funds that are trapped in the invoices. Essentially, it’s a way to receive cash earlier rather than wait for outstanding receivables. What is more, the business is no longer dependent on customer payment, which minimises the risk by realising the receivables earlier and transferring that risk onto the factoring provider. Factoring is typically a quick way to acquire cash, but there is a significant amount of paperwork required to start the process, and it can also be very costly. After adding the cost of upfront fees and the amount the invoice is discounted, a business could be foregoing up to 30% of its receivables for the convenience of quick funds. Nevertheless, depending on the business needs, this may be the best short-term option to improve your cash flow.
3. Credit Card
Credit cards are familiar to everyone, which is why most of small to medium businesses tend to use them as their main business finance option.
Credit cards are usually the perfect buffer for smaller expenses, such as business travel or office supplies. Furthermore, when accepted, this option is probably the most convenient method of obtaining small business finance. However, as with everything, credit cards have downsides, usually credit card limits are not high enough to fund larger business purchases for items like machinery, inventory or database services. Furthermore, the use of credit cards carries some risk of impacting the personal credit score of the business owner as typically they are the ones who will guarantee the credit card debt.
If you are looking for unique, low cost business finance options, you should definitely look into this funding option. Crowdfunding is the practice of funding a project or venture by raising money from many people who each contribute a relatively small amount, typically via the Internet. Those sites allow you to select your goal by setting how much money and over what period of time you want to raise. With this method, you can invite your family or friend to contribute to your project or business in exchange for a small piece of your business. However, keep in mind that this business finance option isn’t relevant if you are looking for long term business financing. It works the best if you have a particular, short term need or project.
5. Angel Investor
Whether you are an early stage start-up or a growing business, you could consider reaching out to angel investors to finance your business. This business financing method will require more creativity and more effort, but angel investors can typically contribute more than just money to your business. Angel investors can offer valid support and provide insight to help your business succeed, because after the investment is made, it is in their interest to grow your business. With this type of business financing, it is typical to give up to 25% of equity in the business. Nevertheless, with the right investor, the benefits to your business will likely outweigh the cost.
6. Venture Capitalist
This is another start-up friendly form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential or have demonstrated high growth already. Raising funds through this method, you could potentially raise a large injection into the business. The downsides of this type of business finance are that venture capitalists will tend to want to have a say in company decisions and typically to aim to recover the investment within three to five years. What is more, many of start-ups or small businesses will give up a significant number of shares in their companies.
7. Online Lending
Online lending has given rise to a fast growing and varied range of business funding options.
New lenders have pioneered countless innovative and flexible products to serve the constantly growing needs of small businesses. Online lenders are not under the same strict regulations that banks are, they don’t have rigid application processes, approval criteria, and fixed product constructs. Those lenders are able to serve niche needs with new innovative approaches to approvals and pricing and are thus, well positioned to cater to a range of different types of businesses.
However, it is important to note that a lack of regulation places the responsibility on business owners to thoroughly research before selecting a lender and their product. Use your common sense when shopping around for an online lender and lookout for predatory prices like tricky language, confusing pricing and urgent tactics.
There are a wide range of business finance options available so do your research and understand each one thoroughly before deciding which will be the most suitable for your business. As you understand the nuances of the different finance products and your precise business needs, you will begin to narrow your search. It is also very helpful to keep in mind that there is no one-size-fits-all solution for business funding and you will likely need to trial several to find your perfect funding solution.
Is CreditDigital the right business financing option for your business?
Regardless of your needs, it is likely that your business would benefit from a CreditDigtial finance solution. We work with a number of lenders and have the agility to offer a wide range of products to cater for many different business models and scenarios. Our solution will allow you to offer finance to your customers and immediately get paid 100% up-front, without need to chase invoices or use expensive factoring companies. Not only can CreditDigital increase your sales by 30% as customers are able to buy more, but also, we can mitigate payment risk because you are in control of your receivables. The payment is transferred to your account within 1 business day.