With the recent tech boom, there has been an increase in many startups that need funding to grow. When these businesses are unable to raise enough capital from banks, they turn to venture capitalists for the money. Businesses cannot always rely on venture capitalists, especially when they already have their own funding or a well-established business model. With the many choices out there, how do you know which one to select? Let’s take a look at some of the alternatives.
1. SBA Loans
SBA financing is designed for businesses that have a U.S based company, have a business plan, and are an added benefit to the community. SBA loans are available for any business that is engaged in manufacturing, distribution, or serving the public sector, as well as aerospace and defense industries in federally-supported research and development programs. These moneymaking options are tied to the size of your business (new or existing) and where you do your work located.
Under the SBA business loan program, you can use your newly acquired funds for almost anything, including expanding your current operation, buying new equipment, financing a new business endeavor, or purchasing a second home. There are four different loan levels:
- Early Stage Small Business
- Small Business
- Business Opportunity
- Multi-Unit Property Loan
Pros
Unlike an SBA loan, you can obtain a conventional bank loan without having to do all the legwork on getting a business plan approved and showing that you have a good credit score.
Cons
The drawback is that SBA loans have higher interest rates and longer repayment terms.
2. Merchant Cash Advance
Merchant Cash Advance (MCA) is like taking out a small business loan, but you don’t have to worry about applying for a loan or putting property up as collateral. MCA is a short-term business loan that ranges from a few thousand dollars to hundreds of thousands. You pay back the funds received over time, usually within 12 months.
You can use MCA funds to take care of your current business needs like employee payroll or debt consolidation, which will help you increase profits. As long as you have enough to pay your regular expenses, you can get this type of lending without having to apply for a loan, show your financial records, or provide collateral.
Pros
Remember, MCA is a short-term loan, and the funds will be repaid over time. You can use the funds for any purpose (not just for business purposes), such as employee payroll or debt consolidation. You can use MCA to take care of your current business needs like employee payroll or debt consolidation, which will help you increase profits.
Cons
You will have to pay back the funds received over time, usually within 12 months.
3. Personal Capital Lines of Credit
A personal capital line of credit (PCL) is designed for businesses that want to take on short-term debt. This type of business loan gives you a revolving line of credit and the flexibility to draw whatever amount you need when you need it. PCL loans generally do not have fixed conditions or loan amounts, and they usually carry lower interest rates than other types of loans.
Pros
The best thing about PCL is that you can use the money for almost anything, including growing your business or paying off debt. Unlike a traditional loan, you don’t have to pay it back all at once. You only pay back the amount of borrowed funds as you use them. It also helps that you can get this type of lending without having to show your financial records, provide collateral or apply for a loan.
Cons
PCL loans are designed for businesses that need money to cover their current operating expenses. They usually carry lower interest rates than other business loans. PCL loans can be drawn down for a short term or paid over a longer period of time.
4. Factoring Invoice Purchase
Factoring invoice purchase is like a merchant cash advance in that you can use the funds to take care of your current business needs like employee payroll or debt consolidation, which will help you increase profits. This type of lending option is more common in industries where there are large numbers of small suppliers. The businesses generally aren’t required to put up collateral, and they don’t need to provide financial proof that the invoice amount will be paid.
This type of lending usually requires a large volume of invoices, and the firms that offer these loans expect to purchase the business’s outstanding invoices.
Pros
Factoring invoice purchase is a good type of business loan for businesses with an established credit history and who want to grow. Businesses that use this type of moneymaking option are less likely to be rejected in their attempts at creating new contracts because they have shown the ability to pay their customers on time. Factoring invoice purchase doesn’t usually have a fixed rate. You can receive financing for up to 3 years.
Cons
Unfortunately, factoring invoice purchase is not as popular as other business loans because the firms that offer the loans expect to purchase all or most of the company’s outstanding invoices. You must be prepared for this to happen in your business. When it does, you will be required to deliver your invoices on a regular basis and keep track of what you owe the customer.
5. Non-Dilutive Capital
Non-dilutive capital is an equity investment in your business. If a third party investor provides you with capital, it won’t have an impact on the amount of money you earn or the number of contracts you sign. Unlike traditional business loans that require collateral, non-dilutive capital is not tied to the amount of money generated by your business. Only the equity investors can access the cash and pay their own personal expenses with the money they invest.
This type of business loan is ideal for businesses that receive a large amount of business through word-of-mouth. The third party investors may consider your company as a good investment opportunity because it is one of the few businesses in the market with an established reputation.
Pros
The best thing about a non-dilutive capital investment is that you will be able to keep a significant amount of your money. You only need to provide a share of your profits which means you can keep more money to use for growing your business. This type of lending option doesn’t usually have a fixed rate.
Cons
The biggest disadvantage of this type of loan is that it is not guaranteed. You may certainly raise some sales and signed contracts in the short run, but the overall impact on your accounts receivable will be much less than if you were able to get traditional personal loans. An equity investor has a chance to make a return on their investment in the long run, so they will want to see the company’s business grow and profit level increase before they pay back the money.
Another disadvantage of this type of lending is that you need to provide sales and customer information to the investors. It could be difficult for small business owner to find investors willing to invest in their business because most people won’t invest in a brand-new company.
In conclusion, there are many different types of business loans that you can get if you’re in need of funds for growing your business without having to go through the whole financial process. Knowing the pros and cons of each lending option is important when you consider applying for a loan from a bank or a lending service provider.
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