Whether you're planning on buying your favorite neighborhood laundromat or expanding your network of Krispy Kreme donut franchises, you're probably going to need some type of business financing. If purchasing a business, you will likely need acquisition financing, but beyond that you'll need readily available capital so you can invest in inventory, facilities, marketing, and staffing to ensure a profitable and growing business.
The good news is small business lending has experienced strong growth in recent years, giving you more options than ever. And, this growth is having a positive influence on the small business market. According to BizBuySell, a record number of small businesses were bought and sold in 2016, indicating a stronger small business environment with more qualified buyers and more financing options.
Depending on your circumstances, you may either want to pursue an SBA government-backed loan, a traditional bank loan or line of credit, a cash advance, or a line of credit or loan from an alternative lender. The choices may seem overwhelming, but you can narrow them down by asking yourself a few critical questions:
- How much money do I need to borrow?
- What will this money be used for?
- How soon will I need the money?
- When will I be able to pay the money back?
- What's my current credit score?
- Do I have any collateral that I would be willing to put up for the loan?
Once you have a clearer understanding of your needs and abilities, you can more easily determine which type of business financing is best for you. Here's an overview of some of the different types of small business financing offered today:
SBA loan programs. Through participating lenders, such as banks, credit unions and community development organizations, the SBA offers a variety of loan programs for starting up, purchasing or expanding a small business. These loans are guaranteed by the U.S. government, eliminating much of the risk, thus, allowing lenders to extend credit to those they would otherwise decline. Generally, SBA loans have lower interest rates and longer repayment terms. Yet, SBA loans often involve lengthy paperwork and take longer to get approved. In addition, the SBA has strict guidelines on how the money can be used. For more details on SBA loan programs, visit the SBA Loans & Grants web page.
401k/IRA business financing. Also known as Rollovers for Business Start-ups or ROBS, this method of financing allows you to invest your funds from an eligible 401(k) retirement or IRA savings account into a business or franchise without taking a taxable distribution or paying an early withdrawal penalty. This is not a loan; you're using your own capital to fund the purchase, so you don't have to pay back a debt and interest. Yet, if the business fails, you risk losing the money you saved for your retirement. Guidant Financial, a leader in small business financing, offers assistance in 401(k)/IRA financing.
Traditional bank term loans. Many banks also offer traditional term loans, as well as SBA loans. These are not government guaranteed loans, so the terms can be quite different. Unsecured business loans require no collateral, but tend to have shorter terms and higher interest rates. Secured loans, which are often used to purchase equipment, vehicles, or machinery, tend to offer more competitive rates since they often use the asset being purchased as collateral.
Lines of credit. Banks offer both secured and unsecured revolving lines of credit for small businesses. A secured line of credit is designed to help you build business credit. It can supplement ongoing cash flow needs and be paid down and used again repeatedly over time. Unsecured lines of credit, which are usually offered at higher rates, are ideal for new or established businesses looking to supplement cash flow, take advantage of unexpected business opportunities, expand the business, or cover expenses.
Merchant cash advance. Some businesses may use a merchant cash advance to resolve temporary cash flow issues, such as paying employees or purchasing inventory. A merchant cash advance or MCA is not a loan; it is an advance based upon your businesses future revenues or credit card sales. MCAs are often used by businesses that do not qualify for a loan. They can also be obtained fairly quickly, but at a steep price. MCA rates are typically high, sometimes higher than triple digit annualized interest rates.
Loans from alternative lenders. Alternative lenders are changing the face of the lending industry. The funding process is streamlined; applications are submitted quickly online, approval is decided in a few hours, and funds are given in just a few days. Plus, alternative lenders don't require stellar credit scores or apply many restrictions on what you can use the money for. Some are direct alternative lenders, such as OnDeck, which work directly with business owners, and others are lending marketplaces, such as LendingClub, which offer multiple loan options from a variety of direct lenders. The main drawback of alternative lenders is that they usually offer significantly higher interest rates than traditional banks.
With this understanding of the basics on what's available to fund your business, you can research these options further and then select the type of financing that best suits your needs. You can even mix and match a combination of financing and create your own custom plan.