Interested in securing financing for your small business? You’re in good company: 73 percent of small business owners surveyed used some form of financing in the last 12 months. Though traditional financial institutions remain a popular option, having lent about $600 billion to small businesses in 2015, alternative financing options have become nearly as popular, and accounted for $593 billion in small business funding in the same year.
While there are plenty of financing choices for small business owners, determining which arrangement is the most appropriate for your business isn’t necessarily an easy task.
Use this simple guide to understand the ins and outs of small business financing, and to narrow down which types of small business funding may be the best fit for your business based on its past performance, present financial reality — and your dreams for its future.
A Guide to Small Business Financing was created
Why do you need small business financing? Define what you hope to accomplish with small business financing before you apply with any funding source. For example:
- Do you hope to invest in new equipment to increase production of a good or service?
- Do you want to have access to a line of credit you can quickly tap into in case of cash flow shortages when vendors are slow to pay, or during times of decreased demand?
- Do you want to expand operations, or start a new physical business location?
All are legitimate reasons for securing small business financing, particularly given the impact that not having access to funds can have. According to one study, 42 percent of small business owners had to limit their expansion because of lack of financing. Nearly 20 percent were forced to not fill existing orders, or hire new staff because they didn’t have the financing needed.
Not all small business financiers will require that you disclose your intention for securing small business financing, but some may consider how you’ll use funds to determine how much risk they’ll absorb if they approve your application. When you take a moment to define how you’ll use small business financing, you can be sure to apply only with providers whose business model is aligned with yours.
What types of typical financing criteria does your business meet?
The application criteria required to secure small business financing varies significantly based on the provider, and in some cases, the amount of funding you seek.
For example, many online alternative financiers place as much importance on a small business’s past revenue cycles and future projected sales as they do a business’s credit history or amount of time in business. Some may offer financing in amounts as low as a few hundred dollars, all the way up to $150,000-plus.
By contrast, some banks and credit unions may require that any small business applicant have documented proof of financial performance for at least three years, an established (and positive) business credit history, a business plan, and that they seek specific financing amounts, which may require a minimum of several thousand dollars.
When do you need funds? Consider how soon you’ll need to access any funds if you are approved to secure small business financing. If you’ve ever applied for personal funding such as a mortgage, you may recall the amount of paperwork and time involved in the financing decision; the small business financing application and underwriting process followed by many traditional institutions may also take several weeks to complete.
Many alternative online financiers, however, tend to offer a more simplified application, and expedited approval and funds transfer processes — which can be important if your business needs to access cash fast. Consider how long your business can afford to wait to secure funding when you evaluate potential small business financing partners.
Are you willing to put collateral toward the financing arrangement?
Some small business financiers may require that a business applicant put collateral toward a financing arrangement to reduce their risk that the applicant will stop making payments on the amount owed, or will not repay funds as agreed. In some cases, that collateral may be in the form of the business’s assets (such as physical equipment or raw materials), accounts receivables, or the business owner’s personal financial assets. Consider what assets you’re willing to involve in your small business financing arrangement, if any. Though not all financiers require collateral, remember that they may opt to offset their risk in other ways, such as higher interest rates on funds, and/or transaction fees.
What repayment options fit your business model? Some small business financing arrangements may use a predetermined amount, and a fixed monthly payment. If you are confident in your business’s financial performance from month to month, such an arrangement may be a good fit. If your small business’s finances tend to fluctuate, fixed payments may not support your need for financial stability. If sales unpredictability is a concern, consider small business financing options that allow you to use only what you need — and repay it in small increments based on your sales cycles.
Compare at least three options. The small business financing space includes plenty of competition — that’s good news for small business owners. Before you pursue any small business financing, however, make sure you’re informed about your options. Research the rates, terms and financing process from at least three providers, and compare the costs and benefits associated with each relative to your business and its needs.
Additionally, ask questions about any small business financing terms you don’t understand, or that the financier may not overtly address, including fees, penalties for repaying financing early or working with other providers, and how long you can expect the relationship with the financier to last.
Small business financing can help you grow your business, and establish a more financially stable operation. Use these basic ins and outs as a guide to help you secure the best financing arrangement for your business.