For many businesses, both large and small, there comes a time when they need to borrow money. This need might come out of the desire for expansion of the business or the need to meet unexpected expenses. Regardless of the purpose for needing extra cash for a business, it should be noted that not all businesses will want or qualify for traditional means of financing.
Fear not, there are alternatives to financing that will allow businesses of all types to borrow the funds needed.
What are Some Alternatives to Traditional Financing?
Line of Credit
- Term Loan
- Equity Financing
What is a Line of Credit?
A line of credit will work much like a credit card. This will give you the option of only borrowing what is necessary to keep the business going. A line of credit will generally have a higher borrowing limit than a credit card. The interest rate on a line of credit is usually flexible. This means if the Federal Reserves Bank (FED) calls for a higher interest rate on borrowing you would need to pay this higher interest rate.
What is a Term Loan?
A term loan works similar to a traditional form of borrowing. The borrower will request funds of a certain amount. The loan is repaid under the conditions of the term. Borrowers repay the loan according to the terms. The interest rate on a term loan is usually fixed. The repayment terms might be on a daily, weekly, or monthly term.
What is Equity Financing?
Equity financing is an option for small businesses and startups. This type of financing does not need to be repaid. Instead of taking on debt, the business owner sells off a stake in the company. This will raise the necessary funds without taking on the risk of debt. However, it also means you will not have 100% ownership of the company. Not owning 100% of the company means not being entitled to 100% of the profits. You need to give the 20% or so to the stakeholders you sold the portion of the business.
What is Refinancing?
This is a type of financing where you take an existing loan, usually a mortgage, and pay it off with the funds from a new loan. The new loan will generally have a lower interest rate than the loan you are paying off. However, it might not be worth the savings. A business owner is encouraged to do all the math when considering this option. After all, there are other fees associated with refinancing. These fees might total more than the reduced interest rate received. Thereby making the refinance option not as appealing.
What is Collateral?
A collateral loan is a borrower pledging an asset to the lender. Should the borrower default on the loan, the lender will seize the property or asset pledged by the borrower. In such cases, if you need to borrow large sums of money for advances to the company or are wanting to buy property to operate your business, the lender might require collateral before agreeing to finance you. This type of financing is ideal if you have less than perfect or no business credit. A lender will not generally ask for collateral when a business takes out a line of credit.
Which is the Best Type of Financing?
There is no clear answer to this question. The best type of financing for your business is undoubtedly not going to be the best financing for a friend’s business. Whichever financing you choose will depend on the needs of your business. When it comes to making the decision to borrow a business owner, large or small, must weigh all available options. Rely on some trusted lenders who can help you out with such financing alternatives.
In doing this, the borrower receives all necessary information about the borrowing options available. The borrower then is able to make an informed decision on which option is best suited for the needs of their business. Making a sound and informed decision is the best decision a business owner can make. After all, the business owner wants to work with a lender that is honest and is not causing certain failure for the business owner.
In conclusion, this piece discussed non-traditional ways for businesses, large and small to obtain the necessary funds to get started or keep a business afloat. These alternative forms of financing will need to be assessed by the business owner before any final decision can be made about financing a venture. In assessing all available options, the business owner is not going to fail. Yes, it would be ideal not to need financing, but your business is probably no different than all others.