Small businesses require external financing from time to time to either expand operations or keep afloat during hard economic times. The funding, however, doesn’t always come easy. Most of these businesses have a hard time finding a financier with flexible terms that they can comfortably meet and still maintain profitability. A considerable percentage, therefore, end up missing expansion opportunities due to lack of information on working finance plans. But you don’t have to, here are ten reliable sources of funding for your small business.
The fact that you are already running a small business means that you have tested the markets and can confidently gauge your potential. Use this experience to estimate the amount of finance you need and even get mentorship from crowdfunding investors.
There are numerous crowdfunding platforms online with investors ready to inject capital into viable small businesses and offer you entrepreneurial mentorship that steers your company to profitability. Plus the repayment terms are quite flexible as you only part a small percentage of your pre-tax income for a definite period.
2. Pledge future earnings
You can also pledge a portion of your business lifetime profits in return for finances to boost your small business operations. Also known as thrust funding, the future earning pledges are similar to crowdfunding except that most are lifetime commitments while crowdfunds run for a specific period. When thrust funding, you don’t need to show your business credit ratings or other stricter rules that banks demand. You only need to convince an investor on the viability of your business idea.
3. Angel investment
Do you need an immediate investment solution and can’t help waiting for investors on online funding platforms to review and respond to your requests? Pitch angel investors directly. There are several investments clubs packed with investors continually reviewing pitches across the country. Research widely and approach one whose investment trends play well with your brand and sell them your small business idea.
Large banks aren’t always the best friend to small businesses. Apart from the bureaucracy involved in loan application and processing, they are also not the most ideal financing source for small business loans as their non-friendly, and rigid repayment terms often defeat the purpose of the loan.
In such a case, consider approaching small business microfinance instead. Unlike banks, these you don’t need a strong credit history or collateral to access loans, especially when applying for small loans below $35,000. The loan processing time is also fast and affords you flexible repayment terms. Their interest charges are, however, higher than the bank rates.
5. SBA loans
Do you fit the government’s criteria of a small business for the industry in which you operate? If you do, consider applying for a loan guaranteed by the U.S. Small Business Administration (SBA). The administration guarantees small loans not exceeding $50,000 offered through partner banks. Reach out to an SB loan processing institution on more qualifications needed for this type of loan.
In most cases, the loan also comes with basic finance management training offered by the lender that not only helps hone your entrepreneurial skills but also boosts your qualifications for more advances in future. SBA loans are great for a young and ambitious entrepreneur unwilling to tie up their future business profitability to co-sharing in the name of angelic investors.
6. Use factoring
As the business financing landscape continues to condense, entrepreneurs with small businesses are forced to look for alternative sources of funding. Chief among these is factoring whose popularity has soared in the recent past. Factoring involves selling small business receivables before maturity and at a discount for cash
It works best for businesses with immediate cash needs and substantial immature receivables. Factoring also works for small businesses that need to fill orders or fulfill tenders long before they receive full pay or down payments. In this case, you don’t need a good business credit score.
7. Small business line of credit
A line of credit for a small business is similar to your credit card. It grants your business access to a pool of finance that you can withdraw whenever in need for unrestricted use. Like a credit card, you only incur interest on the amounts you withdraw and once repaid, the pool is refilled. You can take advantage of this little-known source of finance for your small business to either fund expansionary projects or just maintain liquidity during hard economic times.
This rainy day backup plan also offers immediate access to large capital with flexible rates. It also forms a bridge to higher loan access in future as prompt repayment goes a long way in boosting your business credit score rating.
8. Asset financing
Do you have an expansion plan whose revenue projections far outweigh the initial capital? Does this expansion require investments in an asset that your business savings or credit line can’t finance? Consider asset financing, also known as equipment financing, where the financier funds part or 100% of the equipment purchase cost and uses it as collateral for the asset loan.
This allows you to expand operations and use proceeds to finance the asset loan. The repayment duration can be long-term extending into the life of the equipment or short term where you get to keep the asset as soon as you complete the repayments.
9. Purchase order financing
What happens when your product reselling business receives huge orders and your supplier is unwilling to advance you the items on credit? You turn to purchase order financier that work relatively similar to receivables financing. This form of finance advances you enough funds to buy the needed products from a supplier for cash to meet the enormous demand.
The lender then takes their principal amount plus interest after you receive payment. This source of finance resonates well with product resale businesses with large profit margins with the need for product customization.
10. Merchant cash advances
This is by far the fastest but also the most expensive solution to your capital problems even for a business with a bad credit history. In this case, you get to receive the loan in lump sum almost instantaneously with minimal paperwork. The payment terms for a merchant cash advance involve the lender cutting into your daily profits for until they fully their loan fully.
Though such advances attract what most would consider exploitative interest, they are also the most flexible. This implies that the lender doesn’t punish you for slow weeks or months. If you make more sales in a day, they take more repayments home meaning that they will also contend with low pay on a slow day.
Most small businesses remain small because their proprietors are either afraid of the commitments that come with external financing, or are just unsure of where to source for funds. You can, however, ignite an expansionary thrust while riding on safe sources of finance like SBA loans, angel investments, and even factoring. These shield your business from financial shocks and even if it comes to worst and your plans fail, the only significant impact most of these finances can have is getting you back to your earlier financial position before the investment.
Author: Teddy Hill
Teddy is the founder of Startup Capital company, a consultancy firm that mentors young entrepreneurs and small businesses. He has over 30-years experience as a banker and is well versed with different businesses pain points in matters finance that he now helps these companies address.