If you’re running a small business, you’ve got a long list of operational concerns, with cash flow at the very top. Conducting day to day operations, hiring and managing employees, maintaining inventory stock, keeping clients happy, and expanding your business all require sufficient working capital. No matter what type of company you run, you’ll need to determine the best small business financing solutions to ensure enough working capital is at hand to meet your needs.
Entrepreneurs have been underserved by the mainstream banking system for a long time, making small business financing a touchy subject for many. The good news is that today, small business owners have more options than ever when it comes to accessing business funds. Some of those options are relatively fast and painless, while others require piles of paperwork and days, or weeks, of waiting.
If you’re looking for funds to help bridge cash flow gaps or fund growth initiatives, it’s a good idea to understand the most common options before you apply.
The Old-School Way: Bank Loans
The “traditional” way of small business financing is to go to a major bank and apply for a business loan. It used to be more common for business owners to develop long term relationships with their local bank. However, since the 2008 financial crisis, banks have tightened their lending criteria, making it much more difficult for small business owners to get approved for business loans. Big banks now approve as few as 25% of loan applicants.
That low approval rate is disheartening for many entrepreneurs, especially when you consider the lengthy process. Small business owners applying for a loan from a major bank must often submit long application forms, tax returns, proof of several years in business, proof of profitability, cash flow projections or other financial data about your business, and possibly owner investment information and more. On top of all that, you’ll need to submit to a personal credit check, even if you’ve incorporated or have otherwise separated your business from your personal affairs. You also might need to offer collateral, such as personal property, in order to secure the loan.
Another thing to consider is the amount of the loan. The average loan size from major banks is typically around $500,000. If you are a small business owner, you might find that you only need a fraction of that amount in order to make payroll, keep your inventory stocked, or move forward with a new marketing initiative. There are plenty of reasons why you might want a little bit of extra liquidity, but not want to take on much more than that, especially if it means paying interest on much more money than you really need.
Once you apply, you may have to wait days or weeks before finding out whether the bank will approve your request for a loan. That’s a lot of time and effort to invest, especially when you consider that the majority of applications are denied. It’s no wonder that many entrepreneurs look for other sources of small business financing instead of traditional term loans from major banks.
A More Flexible Way: Fintech Lenders and Lines of Credit
In recent years, a new wave of alternative online lenders has been great news for SMBs seeking greater flexibility, speed, and smaller, more manageable loan amounts. While even smaller banks typically lend amounts in the low six figures, alternative online lenders typically lend amounts in the low thousands of dollars and up. Alternative lenders now offer many popular products, one of these being business lines of credit.
In general, lines of credit are extremely useful financial products for small business owners to consider before applying for business loans. A line of credit refers to an agreement between you, the borrower, and the lending institution, stating a maximum amount of funds you can borrow.
A line of credit offers revolving debt and functions essentially just like a credit card. When you need funds, you use your line of credit to advance the money, then repay it to replenish your credit line. You only apply once, to establish the line of credit; there is no need to reapply once you’ve got one.
Another differentiator between loans and lines of credit is how you pay interest. With a term loan, if you’re approved, you get a lump sum and pay interest on the full amount. With a line of credit, just like a credit card, you only pay interest on the amount that you borrow. Since a line of credit is “revolving” debt, there’s no end date or term. Instead, you can keep using it, when and how you want, as long as you keep up with any fees or payments that you owe.
The flexibility of business lines of credit makes them an attractive option for business owners who run healthy businesses and occasionally need access to some extra funds. Online lenders now make the process of applying, getting approved for, and using business lines of credit faster and easier than ever. One such fintech lender, Fundbox, offers an online sign-up process that takes just seconds to complete, and returns credit decisions just hours later. That’s a far cry from the old days of waiting weeks to learn about your approval status.
Smart Tools For Growing Your Business
As a small business owner, it’s almost inevitable that you’ll encounter unexpected cash flow challenges, gaps or surprises along your journey. No matter how healthy your revenue is, extra working capital can sometimes make daily operations or growth initiatives easier to accomplish.
If you’re looking at small business financing solutions to fund your growth, fintech companies are emerging with new and simpler options for business owners like you. Whether you work with a major bank, a small local bank, or an alternative fintech lender, a business line of credit can be one of the most helpful tools in your toolbox.
About the Author: Irene Malatesta is a business content strategist with Fundbox, passionate about working with entrepreneurs and mission-driven businesses to bring their 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.