By: Samantha Mannis
The top problem one encounters when running a business is having the available cash or credit to do so. You may be asking yourself, “how can I get the funds I need to start my own company?” Perhaps you wish to expand your business, or make some changes. You will need money for growing your business. Alternatively, maybe your business is struggling and you have to make tough decisions. In these situations, money usually comes in handy.
There are several strategies to get the capital you need to run your business. Although the process may seem overwhelming, Ask Brien is here to help with a breakdown of several business funding options to get you started!
Home equity line of credit
A home equity line of credit, or a HELOC, is a loan in which the lender allows the borrower to access funds on an as-needed basis. The collateral of a HELOC is the borrower’s equity in his or her house: similar to a second mortgage. NOTE: If you’re incorporated or have an LLC, taking out a HELOC is putting your personal assets at risk. If this is not a risk you want to take, there are several other options to look into on this list!
There are a variety of loans you can get from the bank. They will either be secured or unsecured and short term or long term. Bank loans tend to have lower interest rates than loans from private lenders because a bank has numerous ways that it gets revenue besides issuing loans.
Because of the lower interest rates, most businesses will want to apply for a bank loan, however NOTE: due to this demand and several other factors, bank loans are often harder to obtain. You may need to establish a history with the bank that you wish to take out a loan with. Similar to a HELOC, a bank may not provide a loan to your legal entity, but rather to you as a personal entity, making you personally liable if the loan is not repaid.
There are several types of banks including commercial banks, regional banks, credit unions, and savings and loans banks. Each type of bank has different policies and credit criteria, and being well informed is critical. Credit unions usually have the best rates, but may prohibit you from taking out a loan for your business. Savings and loans banks are community and real estate oriented.
Previous Blog Post: HOW TO TURN YOUR IDEA INTO A SUCCESSFUL BUSINESS PT. 1
Law requires that 65% of their funding be designated to real estate— so they can be a useful resource for a business owner looking to open a store front or office space. Commercial banks (Chase, Bank of America, etc.) can often be difficult for small businesses to get a loan from due to the perceived risk of the investment. All banks may provide loans, however, to businesses that apply and receive an SBA–Small Business Administration– loan (see SBA discussion below).
All of these potential options should be considered. If you are rejected by one institution, another could be a better fit, so do not put all your eggs in one basket and get discouraged– life is a number’s game after all!
There are several companies unaffiliated with a bank or government institution that lend money to small and medium-sized businesses. Since the revenue of these private companies relies solely on issuing loans, their interest rates will be higher. However, because of this, a loan with a private lending company can be easier to obtain than a standard loan with a bank.
Small Business Administration
The SBA can be a useful resource for business owners who may otherwise have difficulty qualifying for a traditional loan. It is a government supported entity that participates in low interest loan programs which can assist you financially with your small business. You can find information on SBA loan eligibility here! Fun fact: In 2015, the average SBA 7(a) loan size was $371,628.
Another Fun Fact: https://smallbiztrends.com compiled some research on loans and their effect on startup success. Receiving a loan increases the chances of a small business’ survival!
You can always apply for credit cards and rack up a little credit card debt—although this is not necessarily the best option. Please do so with the utmost caution and responsibility. There are also several credit cards that a business owner can apply for and use for business expenses. These credit cards can offer many perks and bonuses that are helpful in running a business such as cash back deals, spending points, and exclusive business hotel and travel packages and discounts.
Speaking of credit cards, did you know that in order for a business or company to be able to accept credit cards as payment, they must set up a special account called a merchant account? Businesses pay a percentage to the private company or bank where this account is held, so that they have the ability to take credit cards. If a business has a stable proof of sales with the merchant account, the company can give you an advance of funds, with the agreement that you will pay off the advance. Getting a merchant account advance is relatively quick and easy, however, it comes with a high APR, and your payment plan can fluctuate if your sales unexpectedly ebb and flow.
When your business grows, you may need additional funding. According to a U.S. Bank study, 82% of businesses that fail do so because of problems with cash flow. If you are looking to expand your business without increasing your debt, you may want to consider factoring as an option for additional revenue. What is factoring? Factoring is when a business treats its accounts receivable or invoices as collateral, and sells it to a third party company–known as a “factor” — at a discounted rate. The third party “factor” then gets to collect from the business’ customers. Rather than waiting the 30-60 days that it may take a customer to pay, factoring allows businesses to build up cash flow quickly. It can lower the burden of rising costs on a growing business and allow for flexibility in a business owner’s financial decision making. (For a more in depth look into the different types of factoring, check out this article!)
As you can see, there are many financial resources available to you and your business, but with finances comes great responsibility. None of these options are risk free, so make sure you do your research, read the fine print, and asses what risks are manageable for you before signing on any dotted line to insure long term financial stability for you and your business!
Samantha Mannis is a writer and filmmaker with a passion for business as a third generation creative entrepreneur and autodidact. She is proud to be a part of the Ask Brien team, where she learns something new every day from colleagues and users alike! Samantha also loves her two golden retrievers, Scrabble, Italian food, and sugar cookies.