One of the critical aspects of opening a new business or expanding an established one is finding appropriate business funding. You have a few options for acquiring the necessary startup capital, each with its own particular set of nuances that may or may not coincide with your business model.
Determining the size and scope of your business is key when approaching potential lenders, as they may require you to provide an exact plan on how you intend to repay the debt.
Primary Types of Business Funding
When looking for business funding, you have three primary sources at your disposal. And because the process of acquisition can be involved, having your “numbers” in order should help you streamline the process.
- Small business loans: This is probably the most common way to fund a new business startup. Small business loans can derive from numerous sources, such as banks, credit unions, the U.S. Small Business Association, or angel investors. With this business funding type, potential sources look at the business plan, personal credit history, and several other factors.
- Merchant cash advance: This differs from small business loans because your advance is based on potential credit card sales. A merchant advance is ideal for small and mid-size businesses that find it difficult to get business loans or venture capital from banks or leasing companies. This type of funding almost always requires a credit card processing agreement with the funding merchant.
- Unsecured business loans: Unsecured loans are monetary loans that are not secured against the borrowers assets. These may be available from financial institutions under many different service packages, including credit card debt, personal loans, bank overdrafts, credit facilities or lines of credit, and corporate bonds. The interest rates on unsecured business loans can be in the double digits for those with less than perfect credit or no credit history at all.
Choosing a Funding Type
Before going into negotiations for a small business loan, a merchant cash advance, or an unsecured business loan, make sure you know exactly how much funding is needed and how that funding will be spent. Here are some things to consider when applying:
- How much money do I need? For a small business startup, determining the startup capital estimate should be addressed in your strategic business plan. Accuracy is important, so be sure to list any and all expenses you anticipate facing in the opening months of operation.
- How will I spend the money? When asking for business funding, many lenders will ask you to outline in detail how every dollar you request will be used. A small business loan is often needed for operations (new employees, marketing, etc.), assets (equipment, real estate, etc.), or to pay off current business debts.
- When will I repay my small business loan? You will explain in detail how this small business loan will serve as the catalyst for business operations. Use financial statements and cash flow projections to convince the lender that the loan will be repaid through the expected long-term profitability of the business.
- If the loan is denied, what is my next move? Portraying a confident and determined attitude can let lenders know that rejection will not discourage you from starting or growing your business. Chances are that your application won’t be successful in your first attempt. Therefore, try to access all possible avenues of business funding to increase chances of success.