Different Types of Financing for Small Businesses in 2022
Starting your small business from scratch can be daunting. For many of these companies, financing was a big challenge. Statistics show that about 29% of businesses fold up because they run out of cash.
Sadly, financing is not so easy for business owners. There are so many options that might be confusing in terms of requirements, cost, and other factors. Most times, these options can be confusing such that making a choice is difficult.
This piece will compare the most common types of small business financing available. That way, you can make the best decision to finance your business.
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Who Is a Small Business Financing Lender?
A small business financing lender is a financial institution that helps businesses cover the costs of operation and growth. These institutions include banks, credit unions, online lenders, etc., that are backed by the government to offer small business loans.
A small business financing lender usually allows business owners to use their funds for anything. They can use the funds for working capital, equipment acquisition, and even real estate investment. However, some loans come with conditions that do not allow business owners to use the funds as they like.
This is why as a small business owner, you must understand how small business loans work. Below is a comprehensive list of loans available to small business owners.
Options to Finance Your Business as a Business Owner
What are the choices you have to fund your business as a business owner? The following are some of the funding options available to small businesses.
Online loans are like regular bank loans but a little better. The first distinction is that most of the application process happens online. Most online lenders will not require you to complete paperwork in their office. That usually makes the application process faster and easier.
Online loans vary in scope, cost, and purpose. However, the common thing about all of them is that they are more efficient.
You might even find a small business financing lender in this category that offers pre-approval. That is a notice that tells you beforehand if you qualify for the loan. They will also tell you the amount you are eligible for and their rates before you apply.
Small Business Grants
Small business grants are undoubtedly the most sought-after source of small business financing. Grants are more like free money because you don’t have to pay them back. However, since they are free, everyone wants them. As a result, competition for even the most generous grant programs is frequently fierce.
Grants can come from different organizations and the amount varies. The government, for instance, makes numerous grants to small businesses. In most cases, the funds are disbursed to help the government achieve specific goals.
Private companies, community organizations, and nonprofit foundations can offer grants too. These grants can range from a thousand dollars to $1 million or more.
The requirements differ depending on the group offering the small business grant. So, you might have to do a little research to see if your business qualifies.
That said, you should be careful with grants because they are usually associated with scams. In most cases, a genuine grant will not ask you for the application fee. Also, grants do not require people to vote for the winner, nor are the winners chosen randomly.
Business Line of Credit
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A business line of credit is another option for businesses to get you access to liquid cash. Lenders in this category offer you a specific amount of credit (say, $100,000), like with credit cards. But then you don’t make payments or pay interest until you use the funds.
After using the funds, you can start payments over time, usually weekly or monthly. Many lenders allow you to pay off your entire balance early to save money on interest. Some lenders levy additional charges, such as:
Application fee: A fee charged for processing your application
Account maintenance fee: A monthly or annual fee for maintaining your business account and keeping your business line of credit active.
Draw fee: this fee is charged every time you use your credit line.
Inactivity fee: A lender may charge this fee if you do not use your line of credit within a certain amount of time.
You can continue to use your credit line as often as you want as long as you make on-time payments and don’t go over your credit limit. Because small-business lines of credit are revolving, they are far more adaptable than business term loans, which require you to repay a lump sum of money over a set period.
Business Term Loans
A business term loan is a lump sum of capital borrowed from a lender and repaid on a fixed schedule over a set period of time, also known as a term. Term loans typically have fixed interest rates that start as low as 6% APR,
Some lenders however charge variable rates that change based on market conditions. Term loans can range in size from $2,000 to $5 million, with interest rates ranging from 6% to 99.9%.
These loans, like mortgages and car loans, usually have a repayment schedule. This means that the majority of your payment goes toward interest at the start of the loan and less toward principal near the end.
Term loans are frequently repaid early to save interest, though lenders may impose a prepayment penalty.
Traditional banks, credit unions, and online lenders all provide business term loans.
Banks offer low interest rates on term loans, but they have stricter requirements. Also, they take longer to fund. Besides, term loans from banks typically have long repayment terms of up to ten years.
Considering these disadvantages, loans via the internet have been on the rise. They offer alternative term loans with convenience and speed. They also have less stringent qualifications than banks. Furthermore, online business lenders offer short-term loans with repayment terms ranging from three months to three years.
Credit unions offer government backed loans with low-interest rates, just like banks. However, credit unions provide more than regular banks. In addition to the loans, they can give various funding options, such as lines of credit, traditional term loans, and business credit cards.
To qualify for financing, you must be a member of the union. That is because credit unions are often cooperative groups linked to communities. So, in addition to the loan, you may also benefit from more personal relationships.
Credit unions have become a popular option for small-business financing in recent years. According to the Consumer Financial Protection Bureau, credit unions offering small-business financing more than doubled between 2004 and 2020.
There are a variety of options for small business financing. However, every choice comes with its pros and cons. It’s left to you to decide which option is best for you.