This guest post comes to us from Eric Goldschein. Eric is a staff writer at Fundera, a marketplace for small business financial solutions. He covers entrepreneurship, small business trends, finance, and marketing.
When you’re running your own company, a workable business model, great product, and strong vision are all key to success. But you won’t be able to get off the ground without business funding. The fact is, every small business needs access to money before it can get off the ground: Starting up is expensive, and operating costs can require you to invest a significant amount of money before your company can even open up shop.
The good news is that there are plenty of options out there for businesses of all shapes and sizes. Whether you’re starting a one-person company from your home, or setting up your own manufacturing space in a warehouse, you can likely find a business funding option that works for your needs.
First, what is business funding?
Business funding is money that you plan to spend to open and keep your business running. In most cases, business funding takes the shape of equity or debt. With equity, you give up a portion of your company’s ownership to other people in exchange for cash. With debt, you make a promise to pay back a loan with interest.
If you decide you finance your dream, there are many options depending on your needs and your experience. A few popular options include term loans, business credit cards, equipment financing and lines of credit. Here’s a breakdown of each option, as well as its advantages and disadvantages.
1. Term Loans
Terms loans are the most common kind of business financing around, and are likely what you’re thinking about when you consider taking out a loan. These business loans can take the form of a long-term loan, where you pay back your debt over a period of a year or more; medium-term loans, where you pay back your balance (and fees) over a few months; or short-term loans, where you have to make daily or weekly payments on the money you’ve borrowed.
Term loans also include Small Business Administration (SBA) loans, which function similarly to long-term loans but include a guarantee from the SBA, thus making it easier for small business borrowers to get approved.
Long-term loans give you the flexibility to make manageable monthly payments over a long period of time, but can often be difficult for small business owners to get. SBA loansare a little more startup-friendly and offer low interest rates and favorable terms, too, which can be incredibly helpful for new business owners. If you can get approved for an SBA loan, this is often the best option for many business owners, but do note that they require stellar credit and a lengthy application process. If you don’t qualify or you need faster access to cash, a short-term loan may be more appropriate.
Medium- and short-term loans usually come with less restrictive requirements, and are easier to get approved than long-term loans. Plus, the approval window for medium- and short-term loans is much quicker—sometimes as short as 24 hours after applying. These loans, however, are usually more expensive: they can come with double-digit interest rates, and require frequent (and large) repayments over a short period of time. But if you need quick access to capital, these loans may be your best option—just make sure you vet the terms carefully.
2. Line of credit
A line of credit offers you a different method of access to business funding, as it doesn’t require you to pull out a lump-sum loan from your lender. Instead, issuers give businesses a set amount of cash that they can borrow in part or in full for a set period of time. A business line of credit can help you pay for periodic purchases without applying for a loan every single time. They also help you avoid taking out more money than you need, which means you only pay interest on the money you need to use.
There are, however, a few downsides to a line of credit as a business funding option for new and small businesses. You may need to provide your lender with updated documents about your company’s finances every time you take money—or draw—from the account. You may also have to offer collateral in order to get approved, which means putting up a certain amount of cash or assets.
3. Equipment financing
Equipment financing can be a great option for entrepreneurs to access the business funding they need to make specific purchases for their company, such as machinery or office equipment. These loans help you finance up to 100% of the price of used or new equipment that you need for your company. Best of all, equipment financing loans don’t typically require applicants to put up collateral in order to get funding. The application process is straightforward, and the approval timeline is usually short, but interest rates can be fairly high.
There are a few downsides to equipment financing, however. The value of the equipment purchased with the loan serves as collateral—meaning that your lender can sell the equipment you’ve purchased if you fail to make the payments. You may also need to account for depreciation, which means that you’ll end up with a smaller tax deduction on your purchase every year. In fact, you may eventually find that the equipment you’ve purchased has become obsolete before you’ve paid off the loan, which means you’d be paying for equipment you can no longer use.
4. A 0% APR credit card
Depending on your credit history and financials, your business may qualify for a 0% introductory APR credit card. This option provides you with interest-free business funding, as long as you pay off your balance before the promotional interest rate period expires. 0% APR credit cards are a fabulous option for companies that may need access to capital and are certain that they’ll have the funds necessary to pay off a credit card balance during the introductory period. You’ll save on interest payments, and enjoy the flexibility to purchase the necessary items for your business.
There are plenty of downsides to this tactic, however. First, you may not qualify for a 0% APR credit card. These cards are typically reserved for people with a stellar credit history, be it their own credit score or their business’ credit score. Also, you might incur major interest fees if you don’t pay off your balance before the introductory period expires.
Find the right business funding option for you
No matter which method you choose for business funding, the first thing you should do is understand why you need the money, how you plan to use it, and how you expect to pay it back. Each option comes with its own advantages and drawbacks. Once you know why you need the money, and how fast you have to get it, you can make an informed choice about which financing option meets your needs.