When your business is in need of funding, the first place you may think to look is a small business loan. However, there are many other options for small business financing that you may not know about. We are going to look at the two most popular funding choices for small businesses. Keep in mind, there are certain criteria that you must meet in order to be considered a “small business”.
The Small Business Association defines a “small business” by average number of employees over 12 months or by averaging annual receipts over 3 years. The SBA also requires that a business meet the following criteria:
• The business must be organized for profit
• Business is located and operates in the US
• Operates primarily in U.S and pays taxes
• Must be independently owned and operated
• Must not dominate field on national basis
Once you have determined that your business fits into this category, you can decide which funding option is best for your needs. Let’s take look at the top two funding options for small business.
Small Business Loans
A small business loan is usually the first choice for business owners. Too often, business owners do not realize how many options that actually have for obtaining funding for a small business. Even though a small business loan will cost less in terms of interest and points, they are often difficult to obtain. New businesses, less than perfect credit and even some seasoned businesses may have a hard time obtaining a small business loan. If you need funds immediately, you will need to consider the fact that the bank will decide when you get your money, usually 2 to 3 weeks from approval. The application process for a small business loan is quite extensive and can be complicated. Often, you will need to have collateral in the form of assets, property and/or equipment in order to secure the loan. A bank loan will increase your debt and liability on your balance sheet and must be paid back, with interest, over a set amount of time.
Invoice Factoring
By using current invoicing as a guideline for your loan amount, invoice factoring eliminates the need for a good credit history or collateral. Invoice factoring is more accessible to new businesses and businesses with imperfect credit. The funds are typically distributed in a matter of days rather than weeks and the application process is much less complicated than that of a small business loan. Invoice factoring will not increase your debt because it does not show up on your balance sheet since invoice factoring is considered an independent transaction. One of the nice things about invoice factoring is that it manages credit and collections from your customer, making your job easier while providing funding for your business.
Depending upon the type of business and what the funding is needed for, both of these are viable
options for financing. There are many other loans available for businesses if neither of these seems to suit your needs. Take time to research your options and choose according to your needs. A business loan broker can assist you in locating funding for your business and will guide you through the application process. Before heading to a traditional bank for a loan, we also recommend that you locate a broker who can help you with preparing for the application process and walk you through the steps. Missing one piece of information could mean a denial for a loan. It is best to be prepared when applying for funding and a business loan broker can assist with that.