Access to working capital is necessary for every small business to meets its incessant operational needs. Whether you need cash for inventory, infrastructure investment, or simply keeps business running through hard times, capital is always required. Seasonal businesses often require more working capital to stay afloat especially during off seasons. Also, business expansion and an opportunity to buy cost-saving equipment also create a need for working capital.
Securing working capital can made either by applying for a business loan or by bringing in investors. Getting a loan is more preferable option for small businesses, because it has tax-deductible interest payments with lower interest rates, repayment terms are flexible and it doesn’t need much outside participation on business management.
Before securing capital for business, it’s important to understand the loan option that suits your small business’s needs. The most common business financing options which every small business should know are as follows:
Term loans are of two types: long term loans and short term loans. Long term loans usually are dispersed by large commercial lenders. Long terms loans can be used for any long term business needs like expansion, inventory acquisition, debt refinancing, or research. The repayment terms of long-term loans are on a monthly basis. The interest rate charged on long terms loans typically less as compared to short-term loans. With a well established venture, getting a loan term loan is easy and for startup, with a solid business plan.
Short term loans, as the name suggest, are usually acquired for shorter business financial needs. The repayment is made usually on the agreed term date and not on monthly basis. Short term loans are frequently used for shorter term business needs like support small projects to get quick earnings, increase stock, raise cash for accounts payable etc. The loan amount that can be acquired from a short term loan ranges from $5,000 to $100,000. Short term loans are ideal for seasonal businesses.
Business Credit Lines
Another most common type of loan is business line of credit. Business line of credit is more useful for a business and can be obtained when a business need come up. Using a credit line is more like using a credit card. As the associated interest and fees can be high with a credit line, they are best suited for temporary income shortfalls. A credit line is used to cover the short term financial needs of a business. The best thing about using a business line of credit is that, you only will pay interest on the amount used – making it a more preferred choice for businesses with seasonal expenses or incoherent capital needs.
Alternative Business Financing
Survival of small business in current economy is getting more and more difficult with strict lending criteria and limited access to capital. Luckily, there are alternative financing options available for smart businesses to grow and get immediate access to capital. As each option has its own pros and cons, but it gives small businesses hope that they will survive through short term instabilities on their way to business success.
You will find many non-bank lending options, including cash advances, crowdfunding, leasebacks, peer-to-peer loans, and asset-based financing. Any of these options can be used for anything from growing a small business, to meeting capital deficits, or business expansion.
Securing alternative financing options come with solid planning and research. Following some useful tips can get you alternative financing easily. First, you need to discover your existing funding requirements and clearly outline how the funds will be employed. Providing your business financial statements that show positive cash flow with existing business audits to the lender will also help. This will showcase your business repayment ability and interest rate coverage. Verify your credit score and if there are problems involved, get them corrected. Establish your business value and this will help lender in determining how much capital should be offered at a given interest rate. Business evaluation is a must thing which lenders evaluate before approving a loan.
Finally, getting a business loan is tough and numerous factors are involved in the approval process. You need to ensure solid communication with the lenders for the reason that while lending, they need to understand not just the business model, or the background, but also the people running it. This way, your business gets the most suited financial product and expert advice for growth.