When Capital is Needed: Where Do You Turn?

Despite the level of success of your business, at some point you will likely need additional funding. Whether you’re looking for capital to expand to new locations or need temporary help making payroll, there are several options available to help solve your budgeting concerns.

When looking for a lender for your business, start with the basics. Be sure you know your own business profile. After doing an audit of your business, you can then wisely look at your financing options. Some typical capital sources are: traditional lending (banks); alternative financing; equipment financing companies; and friends and family.

Traditional Lending

A traditional bank loan is the route most people think of first. Many feel safer borrowing from a bank, but often because they’re not aware of other options. An average business today has about a 50% chance of being approved. To qualify, you must have been operating for at least three years, will need to provide extensive paperwork (including tax returns and profit and loss statements), and must have excellent credit. In addition, you’ll most likely need to put up a form of personal collateral. While these often boast the best interest rates, time to secure capital becomes a concern. Companies that need the money quickly may need to consider other options, as it can take three to six months for the funding to be approved. Not only that, but even with a lower interest rate, the longer repayment period of a traditional loan means the overall cost is the same, if not more.

Alternative Financing

In contrast, alternative financing options, which often have higher interest rates, are paid back over a shorter period and often have discounts if the amount is paid back faster than agreed upon. Approval for this type of financing usually requires only four months of bank statements, an application, and no personal collateral. If approved, alternative-lending sources can often get a business funded within just three days, making them a preferred option for those looking to secure needed resources quickly. Your/your business’ credit score, time in business, and monthly deposits determine the terms of the deal.

However the term “alternative financing sources” can mean a myriad of things. Often companies will offer an array of products. It’s important to understand the differences and know what you’re signing up for. Some of the options available include: merchant cash advance, total revenue advance, and fixed payment product.  A merchant cash advance is based on merchant credit card sales and is a great option if your business is heavy in credit cards sales over cash. The lender will give you the money up front, and then take a percentage of your future batched credit card sales until it is fully repaid. This means that each repayment amount varies with the volatility of your business rather than a fixed amount. This is a great low-risk option, particularly for those in a business with an unpredictable sales flow. A total revenue advance is calculated on total sales rather than only credit card sales. The money is supplied up front and paid back as a percentage of total income directly from your bank account. This is another excellent low-risk option in that it also fluctuates with daily sales rather than holding a fixed payment amount. The last option is a small business loan. This would be paid by a fixed amount rather than percentage, which means it will be paid off in a predetermined amount of time.

Equipment Financing

Equipment financing companies can be a good option if you’re seeking capital with the specific intention of purchasing machinery or hard goods. Manufacturers often have relationships with financers that could help with the approval process to move it along quickly. Typically this option has a standard term of 60 months and would have a slightly lower interest rate than an unsecured loan since the equipment itself serves as collateral.

Friends and Family

The final option is friends and family. If you have a low credit score or little in the way of collateral, this may be the preferred option for getting a sizable amount of capital. If you do choose this option, do not forego the legal contract so terms are understood despite any personal relationship with the lender. The most difficult aspect of borrowing in this way can be just approaching people you know well to ask for money.

What to Look for in a Lender

Now that you have looked at the lending options, there are a few things that you’ll want to consider when choosing a lender. Whether you’re thinking about a traditional bank loan or alternative financing, find out if they have experience lending in your industry. For an alternative financing source, see how they perform on the Better Business Bureau. Ask about their lender relationships. How long they have been in business? Will they share customer testimonials? Good lender relationships will increase your likelihood of getting approved with a lower credit score and will also get you the best deal on the capital. In both types of lenders, you are looking for transparency. You want to know exactly how the entire process will work, from getting you funded to where the funds come from, and how it will be paid back and when. Be clear about any fees involved. Questions or ambiguity are red flags.

The last step is understanding the terms of your financing. There are numerous websites out there to help you understand the process but the best way to understand your deal is to ask the right questions – a lot of them. When working with a bank, ask for an amortization schedule. When working with an alternative financer, give them the paperwork first, then make sure there are no additional fees. Since they’re not making their profits on the interest rate, make sure you completely understand the direct cost of the capital. If you go with equipment financing, ask for an amortization schedule and make sure there is no “balloon buyout”. This means that rather than making a small interest-only payment and a lump sum principal payment at the end, you will make a consistent payment amount for the entire term of your loan.

Acquiring financing for your company is a necessary, yet intimidating process. The key to selecting the right financing option is understanding your own business profile as well as what opportunities are out there to determine the best match. You want someone who has experience working with your industry, who is rated well by the Better Business Bureau, allows you to receive funding in the time frame that works for you, and has a repayment plan that matches your realistic capabilities. While bank loans are right for some businesses, alternative financing is an expanding industry that gets many businesses funded, quicker, and often with less paperwork, so don’t be afraid to explore these companies and see what kind of deals they can offer you. Overall, you need to ask a lot of questions and do the proper research so you know exactly what you’re getting and how it will benefit your business.

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