3 Useful Financing Methods For a Small Business
Whether you intend to open a new business, or already operate an estabilshed one, it is likely you will require outside financing for some aspect of your business. Major expenses — like opening a second location, hiring new employees, purchasing needed equipment, or something — will frequently require borrowing to cover cash needs.
There are many ways to secure funding in a small business environment. Consider the three methods below to see whether one will work for you.
- Commercial Term Loan
Many business owners initially seek out a commercial term loan from a bank or credit union; these are among the most common methods for funding small business creation and expansion. A term loan has a number of virtues: with a good business plan and a solid fiscal profile, you can often secure loans with reasonably long terms, and fair interest rates. However, criteria for loans are often stringent, and if you don’t have a sufficiently high credit score or a reliable business history, you may simply be deemed ineligible.
- SBA Loan
An SBA loan is similar to a commercial term loans in that it is offered through a bank or a credit union. However, it is partially backed by the Small Business Administration, and is specifically geared towards helping small businesses of all types grow — so you may have more luck accessing one.
There are many types of SBA loans — 7(a) loans, CDC/504 loans, microloans, and others — applicable to varying small business needs. While an SBA loan often requires extensive paperwork and documentation, if you are able to secure one, rates are frequently low and terms long.
Crowdfunding comes in several forms, and typically involves soliciting donations from investors who may or may not receive equity in the business as compensation. In some cases, crowdfunding works simply by securing lots of small dollar donations from a wide pool, in exchange for typically smaller gifts. This can be a great strategy to raise money, but is typically only successful if your business already has a prominent social profile and a wide network of potential donors to tap into.
Other times, crowdfunding solicits more significant investments from venture capitalists, angel investors, or other private investors. Typically, this is done in exchange for ownership equity in the business. While it can be an effective way to raise money, you have to be content with giving up some business control.
Whatever route you pursue, it’s important to realize there are many ways to fund a small business. Investigate the methods above, and others, to determine what’s right for you.