It's crucial, therefore, that business owners become intimately familiar with the many forms of financing available to them. Here's a list of five of the most common types of financing to get you started:
1. Business credit cards.
Business credit cards are one of the most overlooked yet viable ways to obtain business financing. A business credit card works similar to a personal credit card in that it gives the business a way to make purchases on credit while they wait for that sweet revenue to start flowing in.
Business credit cards can be a type of secured or unsecured financing. Like a personal credit card, they're usually unsecured. If you have bad personal credit, you'll likely struggle to get approved for a business credit card right out of the gate. There are secured business credit cards, in which a cash deposit is usually required to qualify for the card, that can be used to establish better personal credit and open up new unsecured business credit card options. Generally, though, you'll need at least a fair personal credit score to qualify for the vast majority of business credit cards.
Business credit cards are awesome in that they're often available to startups. Issuers generally review an applicant's personal credit scores, and will even allow income from sources other than their business as part of the qualification process.
2. Business lines of credit.
A business line of credit is an arrangement between you and a lender in which the latter makes a certain amount of funds available for growing your business that you can draw from at will. The advantage of a line of credit over a regular loan is that you don't pay interest on any of the credit that remains unused.
Business lines of credit can be used for a wide variety of purposes. Smaller lines of credit are more likely to be approved on an unsecured basis than large ones. For lines of credit with limits over $50,000, full documentation is usually required, and oftentimes collateral is as well.
The requirements to qualify for a business line of credit vary based on which lender you're talking to. In the case of a bank or credit union, for example, they'll often take your deposit history into account. If it's healthy, they may overlook weaker aspects of your credit file.
In the case of online lenders, keep in mind that you may be asked to link your bank account so the lender can verify revenues.
3. Commercial real estate loans.
A commercial real estate loan is commonly used to purchase or renovate commercial property your business occupies. Keep in mind that these loans can be collateralized on diverse types of income-producing and commercial properties, so don't give up on the idea before doing your homework to see if you qualify.
4. SBA loans.
If you're a business owner, you've definitely heard of the Small Business Administration (SBA). Banks, credit unions, and other lending institutions partner with the SBA to provide SBA loans, which are guaranteed by the government up to as much as a whopping 90 percent of the loan amount. This guarantee reduces the lender's risk while providing you with financing that would otherwise be very difficult--if not impossible--to obtain at such low rates.
The 7(a) loan, which is used for general business purposes, and the 504 loan, which is frequently sought after for the purchase of equipment or property, are two of the most popular SBA loan programs, but both have different qualification requirements. To complexify matters even further, some banks add their own qualifications on top of what the SBA requires.
Be sure to familiarize yourself with both SBA loan requirements and requirements from individual lenders. A rejection for a 504 loan at one bank, for example, doesn't necessarily mean that you can't try your luck at another.
5. Merchant cash advances.
A merchant cash advance converts your future Visa, MasterCard, American Express, and Discover card receivables--that is, your future credit card sales transactions--into immediate cash. This cash can be used for any business purpose, and you repay it by agreeing to have a specific amount or percentage taken out of future sales. Payments are automatically applied to your remaining balance until the balance is satisfied.
Remember, this isn't a loan, but a purchase and sale of future income. This means that merchant cash advances aren't bound by laws that regulate interest rates. Additionally, the cost is built in upfront, so you'll rarely save money by repaying it faster than agreed upon. As a result, the costs for using this service range greatly, making it a very expensive way to raise cash. However, it can be a lifesaver for businesses facing a cash crunch.