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Common Methods of Financing Small Businesses

At one point or another, every business will encounter a situation in which they need more cash. Even the most successful, dedicated small business owner will face periods where there is not enough working capital to cover day-to-day expenses. Purchasing new equipment, supplies and inventory will also be difficult, if not impossible. This is where small business financing comes into play.

It’s important to note that not all small business financing options are created equal. Your credit, time in business, available collateral, financials, business type and industry are just a few of the factors that will determine which option is right for your business. The following list includes the most common small business financing options:

Bank Loan

Traditional lending sources offer loan products that can help small businesses when they need funds the most. Small business loans typically require collateral (e.g. personal or business owned property). Others are unsecured and require no collateral. While a loan with no collateral may be appealing, keep in mind that they also come at a higher interest rate, and your business will have added debt. Overall, small business loans can be a challenge to obtain because it requires strong credit and financials.

SBA Loan

When the Small Business Administration was founded in 1953, the intention was to increase the funding opportunities for small business owners by guaranteeing financing through loans. Here are your SBA loan options:

  • 7(a) Loan Program provides a maximum of $5 million to the borrower, and can be used for a startup or an existing business for almost any business expense.
  • 504 Loan Program can be used for longer term projects like heavy equipment or commercial property. The average maximum amount is around $17 million, and the typical repayment length is 20 years.
  • Microloan Program is for expenses related to the start or expansion of a small business. This funding option provides, on average, $50,000 and only has 5 years in term length.

An SBA loan is a great option because of the lower rates and extended terms. However, these benefits are only available to those with a stellar credit history and money for down payment.

Invoice Factoring

Invoice factoring works well for small businesses that invoice their customers for services rendered. When a small business is experiencing cash flow problems from slow-paying customers, the company can sell its unpaid invoices to receive quick cash. Essentially, the factoring company purchases the invoice at a discounted price, advances 80-95 percent (typically) of the invoice, and handles the accounts receivable for the business. Depending on the factoring company, there is a possibility that you would could have to give money back if a customer defaults on payment.

Merchant Cash Advance

A merchant cash advance is a very flexible option for small businesses. If a business has strong sales, it can leverage that by selling its future sales in exchange for a lump sum payment. With First American Merchant, the repayment process is simple and hassle-free. Payments are automatically withheld, and we get paid when you get paid. If your business experiences a slow month, you pay less. If you are really busy one month, you pay back more. The quick cash businesses receive – in as little as 24 hours – and the flexibility of this option have made it a go-to option for many small businesses.

Do you need small business financing to keep your business running smoothly? Are you having a hard time covering payroll and other day-to-day costs? Contact our team of experts to learn more about alternative small business loans. We can help you secure fast cash and continue expanding your small business.