Need cash for your business?
Look no further. 59% of small businesses applied for business financing in 2023 to help pay for operating expenses, grow, or plan for the future.
The problem is…
It’s not easy to know which type of financing to pursue. There are dozens of different options — bank loans, merchant cash advances, lines of credit, etc. It’s enough to make most business owners feel paralyzed.
The worst part? Picking the wrong option can sink your business before you even get started.
Don’t worry, understanding your options doesn’t have to be difficult. You just need to know what’s out there so you can make smart financing decisions that help you grow your business.
In this guide, we cover:
- Why Businesses Need Financing
- Traditional Bank Loans
- Alternative Business Financing
- Choosing the Right Option
- Common Mistakes
Why Businesses Need Financing
Let me get one thing off my chest first…
Business financing isn’t just for businesses on the verge of collapse.
Smart business owners use financing as a growth strategy to expand more quickly, take advantage of new opportunities, and beat the competition. Whether you need to purchase inventory, hire new employees, or acquire equipment — having access to capital makes all the difference.
For example, your competitor gets approved for financing and is able to purchase the equipment they need to double production. Meanwhile, you’re bootstrapping and falling further behind.
You know what most people don’t realize? 29% of small businesses fail because they run out of cash. Not because they had a bad product or business model.
They simply ran out of money.
Cash flow problems sneak up on businesses quickly. One slow month becomes two, then three. Bills pile up. Before long, you’re forced to shut down. The right financing in place prevents this disaster.
Fortunately, the financing landscape is changing rapidly. Small and mid-sized businesses are increasingly turning to modern commercial financing solutions that offer rapid approval and funds in days rather than weeks or months. Alternative financing options have become an essential tool for businesses that need fast capital.
Traditional Bank Loans
Bank loans have been around for decades and for a reason.
They offer some of the best interest rates and repayment terms you’ll find. If you can qualify, a traditional bank loan can provide you with large amounts of capital at very reasonable rates.
The problem is:
Banks are very picky. Ultra-picky.
They want stellar credit scores, years of business history, extensive financial statements, and collateral. For new businesses or those with spotty credit, approval is practically impossible.
The approval process also takes forever — sometimes months.
SBA Loans
SBA loans are a special type of bank loan that are guaranteed by the Small Business Administration.
They offer great terms and lower down payments. Government guarantees make banks more willing to lend to small businesses.
The downsides are: Even more paperwork. Even longer approval times. SBA loans work well if you have time on your side, but they’re not the fastest option when you need money quickly.
Alternative Business Financing
Newer options have been developed that are often much faster, more flexible, and easier to qualify for than traditional bank loans.
Let’s take a look at the most popular alternatives…
Lines of Credit
A business line of credit is like a credit card for your company.
You are approved for a maximum amount, but only pay interest on what you actually use each month. Need $5,000 one month and $20,000 the next month? No problem.
Lines of credit are perfect for smoothing out cash flow or handling unexpected expenses. Many online lenders provide lines of credit with a much simpler approval process. You can be approved in days, rather than weeks.
Merchant Cash Advances
Merchant cash advances are one of the quickest ways to get fast funding.
Here’s how they work: The lender provides you with a lump sum of money upfront. You pay them back by allowing them to take a percentage of your daily credit card sales. Payments automatically scale with your revenue.
The big downside is cost. Merchant cash advances often come with very high fees.
Invoice Factoring
Have customers that take too long to pay?
Invoice factoring allows you to sell your unpaid invoices to a factoring company in exchange for cash. Instead of waiting 30, 60, or 90 days for a payment, you get the majority of the funds immediately.
Invoice factoring helps with the cash flow problem of slow-paying customers.
Picking The Right Option
Let’s go through the considerations…
Speed: How quickly do you need the funds? Some options provide money in 24 hours, while others take weeks or months.
Amount: Various financing options have different funding limits. Make sure the type you choose can provide the amount of capital you need.
Cost: Interest rates and fees vary greatly. Calculate the total cost before deciding.
Qualifications: Be realistic about your ability to qualify.
The key is to match the financing option to your unique situation. There is no “best” financing option for everyone.
Mistakes That Kill Your Chances
Okay, now let’s cover what NOT to do…
Applying without preparation: Gather all financial documents ahead of time. Applications with missing information get rejected.
Only considering one option: Different lenders have different requirements, rates, and terms. Shop around.
Ignoring your credit score: Check your credit score before applying. Fix any errors if possible.
Borrowing too much: Borrow only what you need. More debt = more payments that can choke off cash flow.
The biggest mistake? Assuming you won’t qualify and not even applying for financing.
Did you know? 44% of small businesses don’t even apply for small business lending because they assume they’ll be denied. Many of these businesses would actually qualify if they just looked.
Don’t eliminate yourself before even trying.
Final Thoughts
The right financing can make the difference between your business thriving or just barely surviving.
The small business lending market is rapidly growing and expected to reach over $7.22 trillion by 2032, which is great news for businesses in need of capital. Traditional bank and SBA loans, lines of credit, merchant cash advances, and invoice factoring each serve different purposes.
The secret to getting the right financing is understanding what type of financing is best for your particular situation, how much you need, and what you can realistically qualify for.
Research your options, and apply to multiple lenders. The right financing option is out there for your business.
Now get out there and get funded.
