Business Financing Options
By Sara Mackey
For a small business to survive and thrive, funding is of the utmost importance. With as many financing options available, invariably many small businesses choose one that is less than optimal for their situation. It is essential that a small business explores all the positives and negatives of various types of financing in order to make the best financial decision and one that will not haunt them later down the road.
Debt Financing
The majority of new businesses are funded through lending institutions through debt financing. If your small business can pass the stringent requirements to be approved, banks can provide you with a line of credit or a loan. Banks will look carefully at the liquidity of your assets, any available collateral and your company’s cash flow. There are bad credit business loans available, but the interest rates are extremely high and the repayment schedule is less flexible than a standard business loan. However, it is still a viable option for businesses that have bad credit but find financing necessary.
The advantages of debt financing include not having to relinquish any ownership in order to secure financing and are available for businesses that cannot get equity financing. The disadvantage of debt financing is in needing to pay interest and the potential requirement of personal collateral.
Equity Financing
Although debt financing is the most popular option for businesses, there are still thousands of small businesses funded by independent or private investors in exchange for a stake in equity ownership. These type of investors range from friends and family to angel investors all the way on up to the professional venture capitalist investor.
The benefit to equity financing is this funding is generally hassle-free without the need for a long drawn-out approval process found with debt financing. This type of funding typically has the fewest contractual obligations or requirements to meet and the funds are available quicker than other types of financing. The disadvantage is needing to give up part of your ownership in your business and the funding is typically limited as a one-time deal.
Merchant Cash Advance
If your business cannot be approved for debt financing and the high interest rates of bad credit business loans do not appeal to you, a merchant cash advance may be the best option for you. Merchant cash advance loans are based off of projected credit card transactions rather than your past credit history. A loan amount will be determined by your rate and average credit card sales. Once a loan amount is approved, a percentage of each transaction will be then determined in order to meet repayment obligations. The benefit is your business will not have to pay exorbitant interest rates found on poor credit loans and there are no monthly payments to meet. The downside is there are still interest rates charged as well as other fees.
With the many different financing options available, it is vital for a business owner to analyze his financial situation, his ability to repay any financing and which option meets his needs accordingly.
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