Established, large businesses have many sources of financing available to them. Many of them can be quite low risk as well. A small business, on the other hand, often struggles with the requirements imposed by traditional funding options.
There are some different avenues to consider when it comes to funding for small business. Many are not cost-effective and can result in significant interest, fees and repayment plans if the business will even qualify.
Bank Loans
Traditional bank loans are the most challenging funding for small business to obtain. The bank typically needs three to five years of financial statements as well as either a personal guarantee or collateral to cover the loan.
Additionally, loans require long term repayment of principal and interest. This will impact future cash availability for your small business, which can be very difficult if you have more seasonal sales cycles.
Lines of Credit
Like a bank loan, a line of credit takes a lengthy application process and specific criteria. While you only pay interest on the amount of cash used out of the line, there may be monthly management fees that will exist even if you don’t use any of the funds.
Merchant Cash Advance
Credit card companies may advance or funding of a sum of money based on future credit and debit card sales. This will reduce your income for all sales by a percentage until the principal and interest is repaid. The interest on these advances can be substantial.
Factoring
A very cost-effective and lesser known option for funding for small business is through factoring. In this process, a business sells open accounts receivable (AR) to a factoring company, sometimes called a factor. The factor provides you with a lump sum that is a percentage of the total.
The factor then assumes management of those ARs and collects from the customers for the company. A flat factoring fee is usually deducted and your business will receive the balance of any funds in your account.
Factoring offers a simple, direct and very fast option for funding a small company. Choose a factor with experience in your industry for the best rates and for top customer service.
