Methods of Securing Business Loans and Increasing Working Capital
One of the biggest reasons why small businesses fail is due to lack of capital. But what many small business owners may not realize is that financing a small business often becomes a juggling act. It means having several viable options and then knowing what source of financing to use in any given situation.
Though there are numerous finance options available to small business owners, one needs to know where to look and how and when to use them. The following is a brief rundown of the most popular finance options:
Tapping into Personal Assets to Finance a Business
For those business owners who have the means, they can tap into their personal assets to finance their small business. Aside from cash savings, popular options include taking out home equity loans, cashing in on a life insurance policy (called a life-settlement), or using other assets as collateral for a loan. Though this may be a quick and easy source of financing, it goes without saying that business owners may be taking a considerable risk if the venture is unsuccessful.
Asking Family and Friends for a Loan
There are several advantages to approaching friends and family for financing. First, these people may be more willing to offer money then would a professional lender, and one may also be able to negotiate favorable conditions for repaying the loan.
Peer-to-Peer Business Lending
Peer-to-peer, or P2P lending is a form of financing that occurs directly between individuals or “peers” without the involvement of a traditional financial institution, such as a bank. Many sites, such as Prosper.com have set up an “online marketplace” where borrowers post their loan requests and are connected with various lenders who “bid” on the chance to finance the loan.
There are several advantages to choosing this financing option: lenders bid on each loan request keeping interest rates low, there are fewer loan requirements, and business owners get a chance to tell their story. But these loans are usually limited to no more than $25,000, and defaulting on P2P payments will still affect credit history.
Small Business Loans From Banks and Commercial Lenders
Small business loans provided by banks and commercial lenders can either be secured or non secured. A secured small business loan is backed up with collateral. Because the collateral reduces the risk of granting these loans, lenders tend to offer better interest rates, longer repayment periods, and they can be taken out for greater amounts of money. An unsecured loan is one in which no collateral is offered as security against loan. Due to the greater risk involved, banks and commercial lenders will more closely consider a business’ credit rating and financial history when deciding whether or not to approve an application. These loans tend to have higher interest rates, short repayment periods, and are given out in smaller amounts.
Sub-prime Business Loans
This sub-group in the financing industry includes bad credit loans and payday loans. These products tend to have high interest rates and strict repayment schedules, and financing is given out in relatively small amounts. Since borrowers seeking this form of financing tend to be desperate for financing, yet limited in options, this market is rife with predatory lenders. The bottom line here is that such forms of financing should be used with caution in limited situations.
Government-Based Loans and Grants
There are several government-based financing programs available for start-ups and growing small businesses. The first place to look is the Small Business Association. They offer numerous loan programs to help small businesses. Business owners should also contact out their local Small Business Development Center to see which financial assistance programs they offer, and where applicable, the local Minority Business Development Agency.
When it comes to government grants, however, business owners should be aware that most of this money is directed at non-profit organizations or are limited to very specific industries. Even where a small business can technically qualify for a grant, this money comes with many restrictions. Those interested in government grants, should check out the list of sites provided by the SBA.
Business Credit Cards and Lines of Credit
Business credit cards and the small business lines of credit available at many banks, can when used properly help small businesses smooth out their cash flow. This revolving line of credit is meant to cover short-term operating expenses, pay for equipment or expand inventory, smooth out seasonal cash flow, or to take advantage of unexpected growth opportunities. Though having access to business credit is an important factor in maintaining a good cash flow, it should be used it with caution. With high interest rates and hefty fees, debts can easily spiral out of control.