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Tips for Choosing the Right Type of Funding for Your Business

Tips for Choosing the Right Type of Funding for Your Business - TaxAct Blog

By Rohit Arora, CEO and Co-Founder, Biz2Credit

As a small business owner, you may find yourself in the market for business loans for a variety of reasons. Perhaps you’re just starting your business and need an injection of cash to purchase equipment. Or, maybe you’ve had a slow quarter and need cash to pay employees. Best case scenario, your company is so successful that you need expansion capital.

Whatever the reason, here’s what you need to know when shopping for lenders.

You can choose from many categories of lenders.

Big banks. Small business owners often approach these lenders first. What you may not realize is that big banks, which are categorized as having more than $10 billion in assets, typically approve fewer than 25 percent of loan requests.

Smaller banks. These entities grant almost half of funding requests and often push SBA loans, which are backed by the Small Business Administration. These loans are attractive, but because a government agency is involved, there is more paperwork involved, which can be time consuming.

Non-bank lenders. While they are a viable funding source, it’s important to do your research. For instance, merchant cash advance companies are frequently more willing to grant loans than banks are, but they charge significantly higher interest rates.

Identifying what type of business loan you need is imperative.

SBA loans. These are government-backed loans that are provided to small businesses through banks and other lenders, including credit unions. The SBA itself does not lend directly to small business owners.

Term loans. This is a common type of bank loan granted to small businesses for expansion, acquisitions, refinancing, and working capital. Long-term loans are typically repaid on a monthly basis and tend to be in larger amounts and with lower interest rates than short-term loans. They are also generally easier to obtain for successful businesses. A secured loan is one in which a borrower puts up a specific asset or property (collateral) that a lender can seize in case of default. An unsecured loan, on the other hand, is granted on the basis of a borrower’s creditworthiness, credit history, and reputation, rather than by pledging assets as collateral.

Lines of credit. A line of credit provides a business with access funds incrementally as its needs arise, rather than having to borrow a large sum at one time. It is used much like a credit card. A line of credit is considered a short-term fix, and interest and fees can be high. Thus, they are best utilized in cases of temporary cash flow issues, not for capital improvements, expansion, or business acquisition.

Alternative financing. Non-bank lending products include merchant cash advances that are repaid as a percentage of daily credit card receipts. These generally are short-term loans at very high interest rates, as much as 30 to 40 percent. They are helpful for companies that require a funding decision very quickly or for borrowers who have less than stellar credit ratings and are unable to secure financing from banks.

Peer-to-Peer lending (P2P). P2P became commonplace through companies such as Kickstarter and Indiegogo, which presented sources of funding provided by individuals through online platforms. It can be effective for arts and charitable/non-profit funding campaigns, but probably not so for capital improvements costing large amounts of money.

Marketplace lending. Marketplace lending is the evolution of P2P lending. Through online technology connecting borrowers and lenders, marketplace lending platforms enable small businesses to secure capital from hedge funds, family funds, insurance companies, and other institutional (nonbank) lenders.

Biz2Credit is among the leading firms involved in marketplace lending, which has disrupted the bank-based loan system of financing small businesses. If you need to help navigating your options, Biz2Credit loan experts are available for guidance. There is no consultation fee. To contact Biz2Credit, visit https://www.biz2credit.com/taxact or call (800) 200-5678.

Rohit Arora is co-founder and CEO of Biz2Credit, an online small business finance platform that has arranged more than $1.2 billion in loans to thousands of companies since 2007. Follow Rohit on Twitter @biz2credit.

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