The most common types of small business financing 

Navigating the world of small business financing can be daunting. We look at some of the most common small business financing solutions.
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At some point, virtually every small business owner finds themselves in need of additional funding. Whether your business is thriving and you’re ready to expand or you need a cash infusion to stay afloat, securing the right type of financing can make all the difference.  

It’s common to begin your journey by looking into a traditional bank loan, but as a small business owner, you actually have many other options. Understanding the common types of financing available to you and their general qualification requirements can help you choose the right solution for your unique business needs. 

The most common SMB financing options 

Navigating the world of small business financing can be daunting, but reviewing the basics of each option can help you make informed decisions. Here’s a look at some of the most common small business financing solutions. 

Small Business Administration (SBA) loans 

The U.S. Small Business Administration offers various loan programs to suit a variety of small business needs. These loans are partially guaranteed by the government and may be attractive to businesses that have difficulty qualifying for traditional bank loans. 

Obtaining an SBA loan requires a sound business plan, good credit history, and sufficient collateral. SBA loans can be a bit more time-consuming to secure due to their extensive paperwork, but they often come with more favorable terms and interest rates. 

Traditional bank loans 

Traditional bank loans are a common form of financing for small business owners. With this type of loan, you borrow a specific sum of money and repay it over time, with interest.   

Traditional bank loans typically require you to have a solid credit history. Some may require you to put up collateral, and you may need to provide a business plan. Securing a bank loan can be challenging due to strict eligibility criteria, but they can be a viable option for businesses with strong financial records. 

Business line of credit 

A business line of credit provides you with approval to access a predetermined amount of funds, but only charges you interest on the amount you actually borrow. For example, you may have a $100,000 line of credit, but if you’ve only used $20,000 of it, you’ll pay interest on the $20,000. 

This is a flexible financing option that can be used for a range of business needs. Application requirements may vary by lender, but generally, they require good credit, a track record of profitability, and some form of collateral. A line of credit can be a good fit for businesses that require flexibility and have the financial discipline to manage an open credit line. 

SMB grants and subsidies 

Grants and subsidies provide funds that don’t need to be repaid, making them an ideal source of financing for small business owners. However, they are often geared toward specific industries or business objectives and may have stringent application requirements. Typically, grants and subsidies are difficult to secure, due to high competition and specific eligibility criteria. However, if you’re able to qualify, they offer a significant financial boost without adding debt. 

Microloans 

Microloans are small loans typically offered by non-profit organizations and certain financial institutions. They’re designed for startups or newer businesses that need smaller amounts of funding. 

While it’s often easier to qualify for a microloan when compared to traditional bank loans, they often have higher interest rates. You may also need to submit a significant amount of documentation. This may include financial projections, personal financial information, and a detailed business plan. 

Working capital loans 

Working capital loans are intended to finance a company’s everyday operations. They are not meant for purchasing long-term assets or investments and are instead used to cover costs such as accounts payable and payroll obligations. 

When evaluating an application for a working capital loan, lenders typically look at factors such as credit history, existing debt load, and the company’s assets. Although working capital loans are generally easier to obtain than other types of loans, the interest rates may be higher. 

Merchant cash advances 

A merchant cash advance is a loan alternative that allows you to receive an upfront lump sum of cash in exchange for a percentage of your future credit or debit card sales. 

This financing option is usually easier to obtain but tends to have higher costs. In most cases, providers will look at your daily credit card receipts to determine if you can pay back the loan. This could be a suitable option for businesses with a high volume of card transactions but weaker credit profiles. 

Equipment financing 

Equipment financing is a type of loan designed specifically for the purchase or lease of business equipment. It can be used for purchases such as office furniture, computers, heavy machinery, or even vehicles. The equipment itself often serves as collateral for the loan, which can make it easier to secure financing even if your credit history isn’t perfect. However, keep in mind that if you fail to make payments, the lender has the right to seize the equipment. 

The application process for equipment financing is typically straightforward. Lenders will usually want to see details about the equipment you plan to purchase, including a quote from the vendor, in addition to your standard business financial information. 

Business credit cards 

Business credit cards can be an excellent tool for managing cash flow and expenses, particularly for newer businesses. They offer the convenience of a revolving line of credit while often providing additional benefits like rewards programs or cash-back options. 

However, it’s crucial to be aware that the interest rates on business credit cards can be higher than other forms of financing, making them less suitable for long-term borrowing. You’ll also need to have a good credit score to get approved for a business credit card with a high credit limit and low interest rates. 

How to ensure your business is ready to secure financing 

No matter which type of financing you choose, proper preparation is the key to success. This includes having a clear business plan, understanding your credit score, and maintaining up-to-date and accurate business information. 

While keeping up with all this information can feel overwhelming, there’s a simple solution. The Markaaz Dashboard can help you be application-ready at a moment’s notice by compiling all publicly available data about your business and ensuring that you have a clear and accurate picture to present to lenders. It helps you spot any discrepancies or outdated information that might affect your financing application. Ensure you’re in the best position to secure financing by signing up for the Markaaz Dashboard today. 

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