If you’re a small business owner, congratulations! You’ve accomplished what some likely told you was impossible and built a business from the ground up. Now it’s time to grow, and credit options are likely needed. Financing business growth can appear daunting until you know your options and which will work best for your business.
Determining the best method of small business financing for your scaling company may seem a bit daunting. In this article, we’ll look at ways for small business owners to get funding and grow responsibly.
Traditional credit options for financing business growth
When you think about ways to fund your upcoming business expenses, there are many possibilities that come to mind. Some of the first ideas are typically using term or personal loans from a bank. Or, you may consider simply using your credit cards. Applying and getting approved for a small business or personal loan can be a time consuming and difficult process. However, there’s a good chance that you already have a business credit card in your wallet right now.
Using credit cards for business growth financing and large purchases certainly does have some advantages. Many credit cards have attractive rewards, like airline miles and cashback on purchases. Also, if handled correctly, using credit cards and paying them off each month helps you build a strong, positive, varied credit history. That good credit history can be useful in a lot of situations later.
Of course, even if you’ve taken steps to separate your private identity and your business (such as incorporating or registering the operation as an LLC), many creditors and lenders will still make a “hard pull” for your personal credit history during the application process. Your personal history and FICO score will be a large factor in determining whether you get that loan or new credit card.
Thus, that “business” loan is often not so different from a personal loan. When it comes to how you are considered by lenders, that “business” credit card may as well be any other newly opened, revolving credit account on your personal credit report.
These can detract from your credit score and may hamper your personal goals, such as obtaining a mortgage or opening another line of credit to fund family-related expenses later.
Traditional borrowing methods bring with them more than theoretical pitfalls for financing business growth. They can put a dent in your actual bottom line.
For example, interest rates for some of the most competitive credit cards can carry APR’s that range from the mid-teens to mid-20 percents. Even those aimed at individuals with excellent credit ratings. Bank loans, especially those for smaller businesses can also bring with them high interest rates. This is especially true if your operation is relatively young.
Consider alternative non-bank lenders
Credit options with a non-bank, alternative lender can help you keep your personal credit and your business credit separate. It can also give you the opportunity to save significantly on interest and fees for your expanding small business.
Lenders that offer a merchant cash advance system, allow borrowers to get an advance on future debit or credit card transactions. The lenders take a piece of future sales, and that slice is often significant. Fees can add up, and in the case of merchant cash advances (MCAs), you can get locked in to daily repayments, making it difficult to keep up with mounting debt.
One of the common credit options that alternative lenders offer for financing business growth is invoice factoring. If you choose invoice factoring, you will essentially sell your outstanding invoices to another company called a “factor,” who assumes the debt. The factor then interacts with your customers when it’s time to collect.
If you decide to go with this credit option, you may receive your funds quicker than if you had applied for a loan, or waited for your clients to pay. However, you’re also sacrificing a percentage of your earnings per invoice to the factoring company. It’s not uncommon for factors to take 5%-40% of the total invoice value, leaving you with only part of the money.
It’s not only some of your invoice value that you lose when working with a factor. You also lose control over your clients experience by placing it (and your business reputation) in the hands of a third party service.
A popular new credit option for business owners considering non-bank lenders is called invoice financing. Alternative fintech lender Fundbox, offers invoice financing (which is similar to factoring, with some key differences) as well as lines of credit to qualified small business owners.
With invoice financing, you don’t hand over your relationship with your customers. Unlike with factoring, if you choose invoice financing, you will continue to deal with your customers directly.
In addition, if you are approved for credit with Fundbox, you can draw funds as you need them, in the increments that you need, and pay only a flat fee when you draw. Most lenders, banks or alternative lenders included, often check your FICO score before deciding whether to approve your application. However, Fundbox evaluates small businesses based on business performance data, not personal credit scores to get started.
Businesses today have more credit options than ever
In the past, there weren’t many options for small business owners in need of extra funds. Today, alternative, non-bank, and high-tech lenders are on the rise, bringing many more options for financing business growth.
Instead of waiting to finalize the hire of an in-demand candidate, or holding up a new marketing campaign, you can now access the spending power that your company has already earned.
Contributor: Irene Malatesta, Content strategist at Fundbox
Irene is a writer and content strategist with Fundbox, passionate about working with entrepreneurs and mission-driven businesses to bring stories to life.
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