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Despite traditional banks being increasingly hesitant to offer credit, countless more funding options are available now than in the past. But, with the barrage of financing opportunities the average business owner is presented with on a regular basis, it can be difficult to sift through it all to find the option that works best for you and your business.
What factors should you be taking into account when reviewing your needs and funding sources? And what are the pros and cons of the major funding options? It’s a big topic to cover -- and, ultimately, only you will know which option will work best for you and your business -- but we’ll dive into the major funding options at your disposal and how to evaluate those options.
Traditional Bank Lending
As a direct result of the financial crisis of 2008, acquiring capital from big banks is more difficult than it was before. Despite this, it’s still one of several major funding options worth considering.
Major bank loans are usually secured, which means they require some form of hard collateral, such as property or cash, as a guarantee. However, the credit limit on major bank loans can go well into the millions depending on the institution and funding product.
If your credit is great and you have a form of collateral you can place down to secure the loan, a traditional bank loan might be a good option.
Business Credit Card
If you require a consistent source of capital, a business credit card could be the perfect fit.
For example, if your business is seasonal -- perhaps generating 35% of your annual revenue during the holiday season in December -- a business credit card can offer a source of funds you always have to tap into when it comes time to start investing in next season.
The credit limit tends to be based on your personal credit history, and it’s usually lower than the average business loan, but the ability to acquire credit through the bank you already work with on a weekly basis is a point of convenience that can balance those points.
If you have an irregular or consistent need for additional funds, such as seasonality, or you prefer to keep everything within the same institution (i.e., your bank), then a business credit card is worth looking into.
Unsecured Business Loan
Alternative lending options, such as unsecured business loans, have become a dependable form of small business funding over the past decade.
As opposed to traditional bank lending, alternative lenders typically offer more flexible approval criteria that take into account a wider variety of factors to gauge your business’ health, such as revenue, profit, debt-to-income ratio and savings.
Unsecured business loans have higher average interest rates than traditional secured bank loans, however, they don’t typically require collateral. In addition, loan processing is faster and more convenient, often providing approval and funding in just one to two days.
If you don’t have great credit or a source of collateral (or you simply need funding fast), an unsecured business loan may be a good fit.
Business Line Of Credit
Similar to a business credit card, a line of credit offers a revolving balance of credit that you can tap into whenever you need it. The differences between the two are few but important.
First, the interest rate tends to be lower and the credit limit higher with a line of credit.
As you might expect, approval can be more difficult than with a business credit card. However, a business line of credit can be both secured and unsecured, so it may not require collateral.
In addition, pulling out cash with a line of credit is customary, with there typically being no fee for doing so. However, a business credit card usually has a fee attached, which may become costly if making frequent withdrawals.
If you have a need for a revolving balance of credit, but a business credit card doesn’t offer a high enough credit limit, this is a useful option to consider.
Points To Consider When Evaluating Funding Options
We touched on several reasons above why each of the different funding options might be a good fit for you and your business.
Now, here are some things to consider when evaluating the various different funding options to help you decide which is the best fit:
• How quickly do you need funding? It can take weeks for approval with a traditional bank loan, whereas alternative lender loans may offer 24-48 hour turnaround.
• How much funding do you need? Do you need $50,000 to invest in a second location, or are you making an equipment purchase for a few thousand dollars?
• How frequently do you need the extra capital? Is it a one-off purchase, are you catching up on bills, or is your business seasonal and you need extra capital to produce additional product?
• Do you have a preferred funding source? Would you prefer to keep it in your current banking ecosphere or does that not matter?
The importance of each of the individual factors above will depend entirely on your business. So, take some time to review the nature of your funding needs and compare that with your available options to find what works best.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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