Every business needs working capital to grow, whether that’s remodeling your current physical location, opening a new one, buying inventory or new equipment, hiring new employees, or other major purchases that are vital to the growth of your company. Thankfully, as a business owner, you have a number of options for how to get small business financing.
Typically, this will take the form of a bank loan or a line of credit. However, there are many alternate funding sources available to businesses, such as SBA loans and online fintech loans. Each of these options will have its own benefits and drawbacks. For instance, some have fees associated with them or take time for approval or funds to come through. Read on to learn more about the options available to you for obtaining small business financing, and the reasons you might choose each one.
Business Credit Cards
According to the SBA, as many as 65% of small businesses have business credit cards. These are like personal credit cards, but they differ in some key ways. For instance, your business is likely approved for a higher credit limit than you personally are—usually $50,000 or more.
Business credit cards have a number of unique advantages, which are likely familiar to you if you have a credit card yourself. For instance, funds are available essentially immediately. You’ll improve your business’ credit rating as you pay back what you owe on time, and the credit limits mean it can be easier to rein in employee spending.
Your business may also be eligible for perks as you use your card. Plus, you’ll be able to separate your business credit from your personal credit, so if either you or your business suffers major financial misfortune, it won’t affect the other party’s credit.
But business credit cards suffer from many of the same problems that personal credit cards do. Depending on your credit and the service you go through, rates may be anywhere between reasonable and exorbitant. If you don’t pay back what you owe, interest will begin to get out of control. Late payments will damage your business credit. And if you need cash rather than a purchase, you’ll likely need to pay a fee—on top of any other fees your provider levies.
Business Lines of Credit
With many loans, you receive the full sum up front and need to pay back all of it. Not so with a business line of credit. Like a credit card, a line of credit is approved for up to a certain amount of money. It’s also “revolving”, meaning it gives you money you can draw upon over time, as you need it, so if you don’t need the money, you don’t need to take it out or pay it back. Typically, small business owners like the flexibility that a business line of credit offers.
However, there are some critical differences between a line of credit and a credit card. Drawing upon a line of credit involves taking out cash, which has no fees associated with it. A line of credit is often (but not always) secured, meaning you pledge one or more of your assets as collateral. Typical fee structures differ from credit cards, and you won’t get the same perks or rewards as you would with some credit cards. Payment plans for lines of credit are usually less structured than those of credit cards, which can be good or bad depending on whether you get behind.
The Small Business Administration, or SBA, offers loans to small businesses across the U.S. The SBA offers several kinds of loans for small business financing, but the two most common are 7(a) loans and 504 loans.
7(a) loans provide a variety of businesses with up to $2 million in capital and 504 loans cover larger projects, particularly those involving purchasing of major assets like real estate, machinery, and equipment (especially if equipment loans financing does not work). 7(a) loans are typically used for businesses that are just getting started, while businesses usually apply for a 504 loan when they’re hoping to expand.
SBA loans are great if you aren’t able to secure funding elsewhere and have some time to invest in the process, or if you’re relatively new to business. They often offer longer loan terms and amortization schedules, which makes paying them back easier. And in 2005, the government increased the amount of money available via SBA loans.
However, SBA loans have significant drawbacks. They often require you to submit more documentation than more traditional lenders would, and they require that you, as the owner, have at least 20-percent interest or more in your business—so if you’re already capitalized, these may be out of your reach. There are also several limitations on what you can use your SBA money for or the maximum size of your business at the time of application.
FinTech: The Changing Face of Lending
Traditionally, small and mid-size businesses have been largely at the mercy of big banks, who considered businesses’ potential solely based on their FICO score. A common problem that business owners face is that the process of opening a small business often damages your credit. Another common problem is that occasional events, like an issue with a single late-paying customer or a seasonal dip in sales, can bring down your score, since that score is just a snapshot of your credit at one moment in time.
This means that a single FICO score is often an inaccurate representation of true business performance and health. The over-reliance on credit scores by banks has made it very difficult for many to obtain small business financing.
However, as financial technology (fintech) continues to take off, lenders are finding ways to incorporate more diverse metrics to rate business potential more accurately. These include data points like bank history, invoice history, and transaction history. When taken together with traditional metrics, these data have the potential to provide a much more holistic and accurate picture, which can then open new opportunities for credit to previously underserved businesses.
For example, fintech financing firm Fundbox offers an online signup process and reviews your business data alongside your credit, and makes decisions in minutes with no required minimum credit score. If you’re interested in growing your company but can’t get approved for a loan via traditional small business financing, online fintech lenders may be your best route.
As a business owner, you have many ways to obtain the small business financing needs to start, grow, and thrive. By weighing your options carefully and keeping non-traditional lenders in mind, you’ll be able to take the steps you need to reach your goals.
Contributor: Irene Malatesta, Content strategist at Fundbox, passionate about working with entrepreneurs and mission-driven businesses to bring stories to life. Fundbox is dedicated to helping small businesses grow by democratizing access to credit.
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.