How to Finance a Small Business

For small business owners, getting the right financing is often a challenge for a number of reasons. Small businesses seldom have the assets, track record, or management background to qualify for conventional financing. Financial institutions only finance large companies because they are safe investments. But without financing, few small companies can grow.

We have created a list of eleven realistic financing options that can help small business owners. These options are available for most small business owners. They can help you take your business to the next growth stage. And once your business has grown, you can leverage that growth and get conventional financing at more attractive terms. Here is the list:

1. Microloans

The SBA Microloan program offers up to $50,000 worth of financing to small business owners. Unlike conventional business loans, Microloans are relatively easy to get. Small business owners can get them even if their credit is not perfect. Furthermore, these loans often come bundled with financial and business consulting. This benefit makes Microloans a great alternative for business owners who need financial and business help growing their businesses.

The SBA does not provide Microloans directly. Instead, the SBA provides guarantees which allow specialized institutions to offer them. The largest provider of Microloans in the US is Accion.

2. Friends and Family Investors

Many small businesses get funding from friends and family investors. The business owner gets funding through a loan from the friend/family member or by selling them equity. Loans allow you to keep ownership of the business but have to be paid back. Selling a part of your business (equity) does not require that you pay back the money. However, it provides ownership to your friend/family member and gives them a permanent share of your profits.

While this method of financing a business is very common, it is also very risky. There is a very real chance that your relationship will be affected – permanently – if anything goes wrong. Unfortunately, the chances of this happening are very high. If you decide to use this type of financing, consider getting professional advice from an attorney.

3. Factoring

Factoring is a type of financing that helps small business that have trouble working with clients who pay invoices in 30 to 60 days. A factoring company can provide you an advance on slow-paying invoices. This advance provides you with working capital that allows you to run your company and take on new clients.

One advantage of factoring is that the finance company relies on the credit of your invoices – rather than on the credit of the business owner. This advantage makes factoring a great choice for small business owners who have little or no personal credit. Learn more about invoice factoring ($20,000 and above) and small business factoring (under $20,000).

4. Purchase Order Financing

Purchase order (PO) financing is a specialty form of financing designed to help small product re-sellers and wholesalers. One of the main problems for small wholesalers is getting an order that is too large. They are unable to handle it and make the supplier payments. Ultimately, they risk losing the order – and the client.

PO financing provides the funds to pay the supplier costs associated with an order. This funding allows you to fulfill large orders and grow your revenues. Like factoring, PO financing transactions don’t rely on your personal credit. Instead, they rely in the capabilities of your supplier and the credit of your client. Learn more about using PO financing.

5. Credit Cards

Most business owners use their personal credit cards at one time or another to finance their business. It’s a time-honored tradition among entrepreneurs. Basically, you are leveraging your personal credit and investing it into the business.

Using credit cards can actually work if you are careful. However, if things go wrong, you could ruin your personal credit. If you decide to use credit cards, consider using them to pay only for the costs associated with a client-specific project. Be sure to pay back the credit card as soon as your client pays you for the project. This approach minimizes your costs and your chances of experiencing credit problems.

6. ACH Loans 

ACH loans are a relatively new product. Generally, they allow you to sell future sales to get immediate funding. Note that this solution differs from factoring, in which you sell current and active invoices. These loans can be made against credit card sales (merchant cash advances) or against conventional sales, payable via direct debit (ACH).

One of the problems of using ACH loans is that they are very expensive. One of the reasons for this expense is that you are selling future sales, which are notoriously hard to forecast. Consult a financial adviser if you decide to use this alternative.

7. Peer-to-Peer (P2P) Lending

Peer-to-peer lending has been gaining popularity in recent years as a way to finance small businesses. Peer-to-peer (P2P) lending does not provide business financing, per se. Instead, the owner can get a personal loan from a number of individuals who provide the actual funding. The owner then uses these funds to finance their company.

Individuals make their own funding decision, based on your personal credit score and your intended use for the money. Keep in mind that success is not guaranteed and some loans go unfunded. Two well-known providers of P2P financing are Prosper and Lending Club.

8. SBA Loans

SBA loans are an alternative for small companies who are past their initial stage and need funding. Although SBA 7(a) loans can be made up to $5,000,000, the average loan amount is $350,000. This amount suggests that SBA loans are used mainly by small businesses.

The SBA does not make the loans directly. Instead, the SBA provides guarantees to banks and financial institutions, who, in turn, provide funding. These loans undergo a thorough underwriting process but are easier to get than conventional loans. You can learn more here.

9. Home Equity Line of Credit

Small business owners can also finance their businesses by using their home equity. They go to a bank to get a loan against that equity. In turn, the loan proceeds can be invested in the business.

These loans are risky because they tie your home to the success of your business. As a result, if something goes wrong with your business, you could also lose your home and its equity. The advantage of home equity lines of credit is that they are comparatively cheap – because your house acts as collateral. We suggest you consult a personal finance expert and a business finance expert if you decide to use this option.

10. Inventory Financing

Inventory financing is a specialty form of funding that allows you to leverage your existing inventory before you sell it as a finished product. It can be a good solution for certain types of companies. However, these facilities can be difficult to manage and expensive to use. As part of the funding process, the inventory financing company must audit your financials and perform a physical inventory check. This process can be cumbersome for some firms. You can learn more here.

11. Asset Based Lending

Asset based lending is an alternative for small business owners who own larger companies – usually with $1,000,000 or more of monthly revenues. As its names implies, asset based lending allows you to finance corporate assets such as invoices, inventory, and real estate. Companies often use asset based loans to finance accounts receivable and inventory. These assets allow the lender to create a structure that resembles a line of credit.

Getting an asset based financing facility is easier than getting a line of credit. Furthermore, most asset based loans don’t have the restrictive covenants associated with bank financing. Learn more about asset based loans.

Need small business financing? We can help.

We are a leading provider of factoring, purchase order financing, and asset based loans. For an instant quote, fill out this form or call us toll-free at (877) 300 3258.