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Small Business Financing Options To Take Advantage Of

Tillie Demetriou
6 Nov 2022

 

As a small business owner, financing is often one of the most difficult aspects of running your business. You may not have the collateral or credit history to qualify for a traditional bank loan, and seeking out investors can be a daunting task. However, there are a number of financing options available to small business owners that can help you get the funding you need to grow your business.

So, we're giving you a complete guide to small business financing options. So your small business can thrive and weather any storm!

Let's get started.

What is small business financing?

Small business financing refers to the various methods that small businesses can use to obtain funding. This can include loans, credit cards, VCs, and crowdfunding, among other options.

Each type of financing has its own advantages and disadvantages, so it's important to choose the right option for your business.

Reasons small business owners need financing

There are a number of reasons why small business owners might seek out financing. Some common reasons include the following:

  • To start a business: Many small businesses require some initial capital to get off the ground. This can be used for things like renting office space, purchasing inventory, or hiring employees.
  • To grow a business: Once your business is up and running, you may need additional financing to help it grow. This can be used for things like expanding your product line, working capital, opening new locations, or hiring more staff.
  • To cover unexpected expenses: Unexpected expenses can pop up at any time, and they can often be difficult to cover without financing. Things like natural disasters, equipment failures, or economic downturns can all lead to increased expenses.
  • To take advantage of opportunities: Taking advantage of opportunities is one of the most important aspects of running a successful business. If you see an opportunity to expand your business, you'll need financing to make it happen.

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Most popular small business financing options

1. A small business loan

A Small business loan is a popular financing option for small businesses. There are a number of different types of small business loans, including small business administration (SBA) loans, term loans, and lines of credit.

Small business administration (SBA) loans: SBA loans are government-backed loans that are available through a number of different lenders. They tend to have lower interest rates and longer repayment terms than other types of loans.

Term loans: Term loans are a type of loan that is typically repaid over a period of one to five years. They can be used for a variety of purposes, such as working capital, equipment financing, or business expansion.

Lines of credit: A line of credit is a type of revolving loan that allows you to borrow up to a certain amount, which can be used as needed. Repayment terms are typically shorter than term loans, and interest is only paid on the portion of the line of credit that is used.

Small business loans advantages:

  • Can be used for a variety of purposes: whether you need working capital, equipment financing, or to expand your business, a small business loan can be a great option.
  • Relatively easy to qualify for: compared to other types of financing, small business loans tend to be easier to qualify for. This is especially true if you have a strong personal credit score and collateral to offer.
  • Fixed interest rates: with a small business loan, you'll have a fixed interest rate for the life of the loan, so you'll know exactly how much your monthly payments will be.

Small business loans disadvantages:

  • May be difficult to qualify for: While some small business loans are easier, others, like SBA loans, for example, can be difficult to qualify for if you don't have strong credit or collateral.
  • May require personal guarantees: Many small business loans will require a personal guarantee from the business owner, which means that you will be personally responsible for repaying the small business loan if your business is unable to do so.

Online loans vs. traditional bank loans

Online loans are a type of loan that is provided by online lenders. Online loans tend to have shorter application processes and faster funding times than traditional bank loans. They also tend to have higher interest rates and shorter repayment terms.

Traditional bank loans are loans that are provided by banks or other traditional financial institutions like credit unions. Traditional bank loans typically have longer application processes and longer funding times than online loans. They also tend to have lower interest rates and longer repayment terms.

As a small business owner looking for a small business loan, you may be wondering if an online loan or a traditional bank loan is right for you. The answer depends on a number of factors, including your credit score, the amount of money you need to borrow, and the repayment terms you are looking for.

If you have good credit and you need to borrow a large amount of money, then going to traditional financial institutions and applying for a bank loan might be your best bet. However, if you have bad credit or you need money quickly, online lenders will be more likely to provide you with quick funding.

2. Business credit cards

A business credit card is a type of credit card that is specifically designed for companies and business owners.

Business credit cards advantages:

  • Can help you build business credit: One of the biggest advantages of business credit cards is that they can help you build business credit. This can be helpful if you're looking to get a small business loan down the road.
  • Can offer rewards and perks: Many business credit cards offer rewards and perks, such as cashback, points programs, and sign-up bonuses.
  • Can provide a 0% introductory APR period: Some business credit cards offer a 0% introductory APR period, which can be helpful if you're looking to finance a large purchase for your business.

Business credit cards disadvantages:

  • Annual fees: Many business credit cards come with annual fees, which can add up if you're not using the card frequently.
  • Higher interest rates: Business credit cards tend to have higher interest rates than personal credit cards, so it's important to pay off your balance in full each month to avoid paying interest.
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3. Venture capital

Venture capital (VC) is another popular financing option for small businesses. VCs are typically investors who provide funding in exchange for equity in the company.

Let's say you own a restaurant, and you're looking to expand. You could approach a venture capitalist and offer them a percentage of your business in exchange for the funding you need. This means that the venture capitalist would own a portion of your business, and would share in the profits (or losses) of the business.

VC advantages:

  • Can provide a large amount of funding: Venture capitalists are typically willing to invest larger sums of money than other types of investors.
  • Does not have to be repaid: Since venture capitalists are investing in your business in exchange for equity, you don't have to worry about repaying the money they invest.

VC disadvantages:

  • May give up too much control: One of the biggest disadvantages is that you may have to give up a significant amount of control over your business in exchange for funding.
  • High risk/high reward: Venture capital is a high-risk investment, and there's no guarantee that you will get the funding you need. You could also end up losing your equity in the business if it fails.

4. Angel investors

Angel investors are another type of investor that can provide funding for small businesses. Like venture capitalists, angel investors typically invest in exchange for equity in the company. However, angel investors are usually individuals rather than institutions.

For example, let's say you're looking to start a new business. You could approach an angel investor and offer them a percentage of your business in exchange for the funding you need. This means that the angel investor would own a portion of your business and would share in the profits (or losses) of the business.

Angel investors advantages:

  • Can provide a large amount of funding: Angel investors are typically willing to invest larger sums of money than other types of investors.
  • Does not have to be repaid: Since angel investors are investing in your business in exchange for equity, you don't have to worry about repaying the money they invest.

Angel investors disadvantages:

  • May give up too much control: Similarly to venture capitalists, one of the biggest disadvantages of working with angel investors is that you may have to give up a significant amount of control over your business in exchange for the funding.
  • An angel investor might set the bar too high: Some angel investors will only invest if they see the potential for a high return on their investment. This means that they might not be willing to invest in a business with lower growth potential.

5. Crowdfunding

Crowdfunding is a type of financing that involves raising money from a large group of people. There are a few different platforms that you can use for crowdfunding, such as Kickstarter or Indiegogo.

With crowdfunding, you create a campaign and set a fundraising goal. People who are interested in your campaign can then pledge money to your business. If you reach your fundraising goal, you will receive the money that was pledged. However, if you don't reach your goal, you won't receive any of the money that was pledged.

Crowdfunding advantages:

  • Can be a great way to generate buzz: A successful crowdfunding campaign can generate a lot of excitement and interest in your business.
  • Does not have to be repaid: Since people are pledging money to your business in exchange for rewards, you don't have to worry about repaying the money.

Crowdfunding disadvantages:

  • There's no guarantee you will reach your goal: One of the biggest disadvantages of crowdfunding is that there's no guarantee that you will reach your fundraising goal. This means that you could end up not receiving any funding.
  • Can be a lot of work: Creating and managing a crowdfunding campaign can take a significant amount of time and effort. Not only do you have to create the campaign, but you also need to promote it and keep people interested in what you're doing.

6. Embedded finance

Embedded finance is a type of financing that involves embedding financial products into other products or services. For example, let's say you own a cafe that uses a cloud-based POS system. With embedded finance, the POS provider could offer you financing for a new coffee machine as part of your POS package.

Embedded finance advantages:

  • Can be a convenient way to get financing: Embedded finance can be a convenient way to get the financing you need since it's all bundled together with the product or service you're using.
  • Does not require a separate application process: With embedded finance, you don't have to go through a separate application process to get financing. This can save you time and effort.
  • Your financial data can get you better terms: With embedded finance, the provider can use your financial data to offer you better terms on the financing. For example, if you have a good payment history with the POS provider, they may be willing to offer you a lower interest rate.

Embedded finance disadvantages:

  • The terms of the financing may not be as favorable: One of the disadvantages of embedded finance is that the terms of the financing may not be as favorable as they would be if you applied for financing separately. For example, the interest rate on the financing might be higher.
  • You might not be able to shop around: Another disadvantage of embedded finance is that you might not be able to shop around for the best deal. This is because you're typically limited to the financing options offered by the provider of the product or service you're using.

Final thoughts

So there you have it. These are five small business financing options that you should consider.

Each option has its own advantages and disadvantages for small businesses, so it's important to weigh all of your options before deciding which one is right for you.

A POS system can help your business in a number of ways.

 If you're a retail business owner, a retail POS system can track inventory levels, average sale value, customer purchase history, and employee productivity.

A hospitality POS system can do all of this as well as help with table management, online ordering, and tip tracking. If you're looking for a more comprehensive solution, some providers offer an all-in-one POS system that also includes features like payroll, CRM and accounting.



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