Everyone has a dream. If your dream consists of opening a business, then you must have also thought about funding. Funding is an integral part of opening a business. However, most people do not know about many types of funding that are available for small businesses. There are many easy business funds available in the market. All you need is correct information, do some paperwork, and a proper business plan to pursue the lender. Many companies in the financial world provide capital business funding. In the article below, we have listed 5 types of small business funds available in the market.
The business line of credit
A business line of credit funding works similar to a credit card. In this type of funding, you can draw funds whenever you need them unless you exceed your limit. You can pay back the money just like you pay your credit card bill. You also pay interest on the money you borrow.
A business line of credit is a suitable option for small businesses. This is the best option to pay a sudden expense. Also, paying money on your own terms is an additional advantage that comes with it. Try to repay your balance as early as you can. This will keep your interest down.
The limit of this type of funding is lower than the usual business capital borrowing. It is generally from $1000 to $250,000. Also, you hardly need to put something as security as most lenders do not ask for it. However, they may ask for security in case of a large line of credit. Flexibility is the biggest advantage of the business line of credit.
To apply for a business line of credit and qualify, you need to satisfy some conditions like you should be in business for a particular period of time, high credit score, etc. Conditions may vary for various lenders.
Working capital funding
A working capital fund is a short term business burrowing. Its purpose is to finance the everyday operations of a company. As the name suggests, this fund provides working capital for covering short term operational needs of a company. These needs may be payroll, rent, debt payments, or advertising.
This borrowing can not be used to buy long-term assets. It usually has low-interest rates.
To get this type of funding, a business owner must have a shining credit history. These fundings are usually tied to the business owner’s personal account. That means, if payment is missed, the personal financial report of the business owner gets affected. It can affect the credit score of the owner.
Big national banks and small regional banks, mostly all of them provide working capital funds. However, you should try to get a fund from the bank with whom you already do business. As they already know your banking history, it is easy for them to approve a fund for you. Also, you already have a lot of information about them.
Working capital borrowings are best for businesses that have seasonal sales. In times when their sales are low, it helps them stay afloat.
Business term borrowing
A business term borrowing is a typical business fund that business owners take from banks or any other financial institution. In this type of funding, money is received as a lump-sum amount and then is paid back in regular installments with a fixed interest rate. The word “term” in the Business term borrowing depicts that the fund has to be paid in a fixed time. This time generally varies between one to five years.
Usually, the purpose of a business term borrowing is big purchases for businesses such as machines, inventory, etc. The amount that you get depends on the type of business and its needs. It may be up to $500,000. Almost any business with good credit qualifies for a business term borrowing.
Merchant cash advance
A merchant cash advance is a type of funding where you get a cash advance against your future sales. The cash is received based on credit card sales deposited into your merchant account. Usually, businesses with a steady volume of credit card sales like retail stores, medical offices, restaurants are most qualified for a merchant cash advance.
In merchant cash advance, you get the funding very fast relative to other types of funding. It is a kind of paycheck advance but for businesses.
In merchant cash advance, a lump-sum amount of money is provided by the lender. The amount may vary from $1000 to $200,000. It is paid back as sales are made. However, the payback time period is very short, typically about 18 months, sometimes, even less.
Also usually lender takes a percentage of sales on a daily basis.
Equipment financing is a type of funding whose purpose is to purchase pieces of equipment for business. For example, to open a restaurant, you need furniture, an oven, and other machinery. This type of financing offers a lump-sum amount of money which is then paid over a fixed time along with interest.
As security, the lender may require a lien on the pieces of equipment. That means a failure of payment of funds may risk your equipment and other personal assets. However, equipment financing is a viable option for small businesses as it saves them from burdening their cash flow. There are many companies that provide equipment financing at a reasonable interest rate.
There are many types of funding available for small businesses in the market. As listed above, the business line of credit, working capital fund, business term borrowing, merchant cash advance are few options that you may use for funding your dream business. While taking funding from friends and family has its own demerits, there are many advantages to this also. Apart from the above-listed options, there are other easy business funds available in the market also. However, you must do proper research, prepare the paperwork, and a nearly perfect business plan before approaching the lender.