Starting a new business is both exciting and challenging, and It can also be overwhelming trying to come up with financing to get the venture off the ground.
Where should you turn for the help that you need to get going?
Taking out a loan from a bank or a credit union is the most traditional route for obtaining funding. While banks are sometimes the source of Small Business Administration (SBA) loans, the conventional loans that banks handle may be a better option in some cases.
For starters, SBA loans are backed by the government, which means there are often stringent terms attached to the loan. Without government involvement approval time is usually faster.
Traditional loans, however, will often have shorter repayment times and they are usually more difficult to get. To increase the odds of getting approved for a traditional bank loan it’s recommended to check credit reports for any inconsistencies and look for community banks before those that are nationally known.
Revenue Based Financing
Revenue Based Financing (RBF) is based on a company’s future earnings. The investors will give capital to a business with the agreement that they’ll receive a small percentage of the gross revenues the business brings in.
This type of loan is best for a business that is already making money and has little to no physical assets to secure a traditional bank loan. It’s also good for businesses that may be up and running but are transitioning and moving in a different direction. Before investors agree to RBF they will likely want to see potential for growth and a plan that shows exactly how the money will be used.
This type of financing offers flexibility regarding what percentage of the profits the investor will take and how long they will give the business to pay off the loan.
This recent phenomenon has enabled entrepreneurs who might not otherwise be able to go into business for themselves to find adequate financing.
Sources such as Kabbage, which works in a completely different way than most other types of financing, is one of several online choices. Kabbage requires that a business qualifies for merchant advances determined by the popularity of social media, input from vendors that the business uses, and the businesses overall reputation on various e-commerce sites.
Upstart and On Deck Capital are other options for obtaining finances online. While online lending is convenient and easier to obtain than many other types of financing, entrepreneurs need to make sure they are aware of any stipulations or terms of agreement. Sometimes there are hidden charges and fees.
Home Equity Loans
For those who own their own home this is a viable option for obtaining financing. These types of loans usually offer flexible and relatively low rates. It’s normally required that the homeowner has at least 20 to 30 percent of equity in the home. The risk is that a business owner could face foreclosure if the business fails.
It’s important to understand that there are basically two different types of home equity loans. The first type is considered a standard loan that the borrower takes out in a lump sum.
The second is a line of credit in which the lender gives the business the opportunity to borrow smaller amounts as needed, up to a certain amount.
Business Credit Cards
While this is a bit riskier, it’s an option for those who don’t qualify for most other types of financing. This is a quick way to get a business started and often the minimum payments are low.
There are lots of companies that offer credit cards for business use. Low and even zero introductory rates makes these cards a great choice. If the business doesn’t quickly turn a profit, however, interest rates and penalties can quickly cause problems.
Business credit cards will work best for those who are pretty sure their business will be up and making a profit in a relatively short amount of time.
University of Salford Press Office / CC 2.0