Banks do not want to risk lending money to small businesses, so the owners have to find alternative means of financing. are Equity or Debt financing, Small Business loans, or Factoring. Additional ways of acquiring funds could be getting money via online investors or applying for a business line of credit.
Equity or Debt Financing
One way a small business can get financing is via Equity or Debt Financing. Equity Financing is when the business owner sells stock to an interested buyer, and in turn, the buyer will own a portion of the company. This type of financing gets governed by a local or national securities authority.
This is meant to protect the investors from people of undesirable means. The business owner prepares a prospectus for investors so that they are aware of the investment and what they are getting for the money that is getting invested. The prospectus would include the company's activities, a board of directors, risk factors, and financial statements.
On the other hand, Debt Financing is when the business owner borrows money from someone via a promissory note or a bond. The lender holds the debt, and the business owner promises to repay the loan. The majority of lenders will request a security on the loan. Some examples of security would be:
A Guarantor is someone who signs the loan agreement guaranteeing payment of the loan.
The endorser is similar to a Guarantor except posting collateral.
These are the people responsible for paying the loan - referred to as principals.
â€¢ Accounts receivable
As soon as the goods get shipped, the bank will advance 60-65 percent of the value.
This would include 60-65 percent of the value of the equipment as collateral.
If the company gets publicly held, it can offer its stocks or bonds as collateral.
Small Business Loans
Another way to get financing is through a small business loan. This type of loan requires that you have a legitimate business. Your credit history should also be in good shape. You will be able to negotiate better rates with a good credit history. The lender will check your financial background to make sure that you are capable of repaying the loan. This means that they will look at your personal as well as business assets.
The financier will request to see the company's financial statement, your personal credit history, and also the credit history of your business. Your business will have to prepare a cash flow projection for up to a year. Moreover, there will be a request for personal guarantees from the owner of the business.
The Factoring Marketplace is when a company decides to sell its accounts receivable or invoices to a third party to raise money for financing. It is a quick way to get funding. The amount of invoices you have will determine how much money you get. The more invoices you sell, the more money you will get. The rates are typically high, but the lender will work with you to get the best possible deal.
Online Funding Sources
A quick way to get financing is to seek online lenders. It takes about an hour to complete the application. Additionally, it takes only a few days for the application to get accepted. Following the completion of the application, funds will be immediately available. The fee for underwriting the loan is relatively small.
You will also get a longer loan term compared to traditional loans. However, the interest rate on the loan is high. If you have an excellent credit history, you will be able to get a much better rate.
Business Line of Credit
When acquiring financing through a business line of credit, you can apply for a non-traditional or traditional line of credit. If you apply for a Traditional Line of credit, you will have to fill out mountains of paperwork. The lender will ask for your personal income tax returns, your business tax returns, registration documents of the firm, and also banking information.
If you go the non-traditional route, you will have to take out a loan through a business credit card. You will get cash quickly. Additionally, the payment options are flexible. The only thing you need to get qualified is a FICO score. You will not be required to fill out tons of paperwork.
In conclusion, five ways in which small businesses can get financing are Debt or Equity financing, small business loans, or factoring. Additional means of funding include online sources of funding or a business line of credit.