Unless your balance sheet is like that of Apple or Coca-Cola, you will probably need to finance your company through a business loan. In fact, even established corporations regularly get capital infusions to address their short-term obligations.

For small and medium enterprises, identifying a suitable funding model can be crucial. If you acquire funds from the wrong source, you risk losing part of your business or may end up locked into unfavorable repayment terms that could impair your entity’s growth for years.

In this detailed guide, you’ll learn the basics of business financing, common sources of funds for small and medium-sized businesses, and the steps of finding the right business loan.

Different Ways of Funding Your Business

You can finance your business in different ways, and all these are classified into two main approaches: equity and debt.

Debt

This refers to a line of credit or loan offering a stated amount and requires you to pay within a stated duration. To get most loans, you must have asset security. This means that your lender might obtain the assets if you fail to complete the loan repayment. You may also seek an unsecured loan that doesn’t tag a specific asset to secure the loan.

Equity

This involves selling part of the company, sometimes referred to as selling equity stakes.

Regardless of the type of product or its name, all business financing solutions fall under equity, debt, or a hybrid combination of both elements.

Here are the different methods that you can use to finance your business:

• Savings – The most straightforward approach to financing your company is using your own cash. In an ideal setup, most people save for a given duration then inject the money into their business. Despite being the wisest, safest, and most conservative approach, it limits the amount you can raise.
• Credit cards – You can also finance your business and extend the entity’s cash flow by paying suppliers with your credit card and earn certain protections, discounts, and other benefits. Though expensive, you can use cash advances as your last resort. The main setback with credit cards is that they directly link to your credit score.
• SBA Microloan Program – This little-known yet extremely beneficial program offers startups and small businesses up to $50,000 in loans. Most also provide management assistance, and one of the loan conditions can be training.
• Family and friends – You can also source funds by letting your friends and family chip in through equity investments, or you can request a business loan. However, using friends and family can affect your relationship if the business fails. You’ll also be forced into a form of partnership even if you don’t need one.
• Angel investors – These can be small executives’ groups or private individuals who can invest in your company through an equity purchase. They may share expertise, money, and guidance to aid business growth. However, there’s a risk of substantially diluted business ownership, especially when there’s no CPA or specialized lawyer to guide you through the equity sale structure.
• Lines of credit and business loans – This is the usual process where banks finance your business via a specific amount of money as a loan. Lines of credit offer revolving facilities that companies use where necessary and pay back regularly. But qualifying and getting this financing is complex, and the option isn’t viable for small businesses with little experience.
• Factoring – This business financing alternative has been gaining traction in the past few years. It’s a reliable source of funding if your customers pay their invoices slowly, leading the business to experience cash flow problems. However, factoring is only applicable if you work with government and commercial clients with good credit. You’ll only qualify if your organization has substantial assets and a proven track record of revenue generation.

How to Get the Right Business Loan for your Company

There’s no standard procedure for finding the right loan for your business. However, the following steps can help you find the right financing to meet your company’s short- and long-term goals:

Review Multiple Offers

Before you begin the loan acquisition process, you must first understand the available options. There are numerous lenders out there willing to support your business. However, all these offer lots of varying loan approval requirements and terms.

SBA 1 (a) Loans

SBA doesn’t offer loans directly but partners with its lenders’ network to serve small business owners. When looking for working capital, you can consider several loan programs, with 7 (a) being the most popular. You’ll only be required to provide collateral if the loan amount goes beyond $25,000.

For amounts beyond $350,000, lenders must collateralize loans, sometimes up to the loan amount. They may use your personal real estate if your business lacks sufficient assets for security. However, you won’t be barred from 7 (a) loans due to lack of collateral if you meet other thresholds.

SBA Disaster Loans

You can also apply for an SBA disaster relief loan if you experience losses due to an economic crisis or natural disaster. They also don’t require security for loans below $25,000, and you won’t be denied because you don’t provide collateral. If you wish to purchase equipment with the loan, you must provide up to 10 percent of the overall buying price as a down payment.

Alternative Lenders and Online Financiers

Another viable option when looking for business loans with minimal or no collateral requirements is to seek online and alternative lenders who can help you meet the company’s working capital needs. Some of the products that don’t present collateral requirements upfront include:

• Invoice financing or accounts receivable financing
• Term loan
• Line of credit
• Equipment financing
• Inventory financing
• Purchase order financing
• Merchant cash advance

You can also seek financing from peer-to-peer lending platforms that link small entrepreneurs looking for funding to investors who can pool funds and finance the business. This amount will be repaid like other loan forms with interest.

Understand What You Qualify For

Some business loans for small and medium entities are more complicated to qualify than others. For instance, SBA 7(a) loans require you to present an operating history of at least two years, meet the eligibility definition of a small business, and meet the minimum threshold for revenues and credit score. You also need to exhaust every borrowing option before you apply.

For web-based and alternative lenders, you may encounter more fluid requirements. For instance, having a lower credit score may not hinder you from getting invoice financing or merchant cash advance. You can also acquire startup loans easily from these sources, and most require an operation history of only six months.

• Evaluating your company’s overall financial position may involve the following activities:
• Reviewing your business and personal credit scores
• Creating vital financial documents like the cash flow statement or profit and loss accounts.
• Checking your company’s overall cash flow and key expenses
• Creating an updated balanced sheet

There are two primary purposes for reviewing your company financials. The first is determining your creditworthiness, and the second is to check your ability to repay the amount. Failing to pay it back can damage your credit score, limiting you from obtaining financing in the future.

Instead of loan interest rates, you may also encounter loan types that use factor rates to ascertain what you’ll pay as the cost of borrowing. This value can translate into a 2- or 3-digit effective APR (Annual Percentage Rate), and this depends on the loan times and how fast you repay the amount.

Understanding All the Terms

After a successful application and approval of your business loan, the next step is to review the terms and conditions. As you go through the loan agreement, check the APR, interest or factor rate, loan term, and repayment schedule. It’s also essential to ascertain the overall cost of borrowing, factoring in the fees and interest. Also, check out the applicable fees, such as the repayment penalty or origination fee.

You may have the best interests of repaying the borrowed amount, but the different requirements and terms can substantially impact your operations if you fail to fulfill your part of the bargain.

You’re in Safe Hands

Starting and running your company can be daunting, but the process can also be rewarding if you have the right business plan and financing opportunities. But getting sufficient capital for the business can is arguably the biggest challenge.

The most practical way to opt-out of this difficulty is to apply for a business loan. You have lots of options that you can try out, as highlighted above. Your choice of financing avenue depends on your business type, how long you’ve been operational, the company’s performance, position, and marketing opportunities. With the above process, you can easily find the best business loan for you.

Are you looking for a reliable lender to help you meet your business goals? Moby Capital is here for you. You can count on us for simple business funding of up to $5 million. We have decades of combined experience, and an accomplished team of finance experts can help you access the funds you need in as low as a single business day. Reach out for more details.