So you've got big dreams to get your business booming, but you're stalling out with traditional brick-and-mortar banks when it comes to sourcing funding? Luckily, as a business owner operating in an age of ever-evolving technology, your options for financing are much broader than they have been in the past.
In fact, there are so many options for online funding sources that you might find yourself totally overwhelmed with which direction to take. So let's break down the seven most popular types of online funding options—including the pros and cons of each—so that you can determine which is the best fit for your business.
The Small Business Administration is a government agency dedicated to assisting small businesses with securing funding from lenders. They serve as a sort of co-signer on your loan, reducing the risk for the lender and providing business owners with a foot in the door. This type of loan isn't provided by online lenders but can be applied to online and funded by a bank.
There are a lot of pros to taking out this type of loan, including low-interest rates and long repayment periods. The largest downsides are the amount of paperwork and the strict conditions borrowers are asked to meet before approval. Certain types of businesses aren't eligible, so make sure to check to make sure you qualify before considering this as an avenue for funding.
Much like a traditional loan from a bank, an online term loan (often referred to as a medium-term loan) is distributed in a lump sum upfront and paid back, with interest, over a fixed timeframe. You usually pay back with monthly payments over a few years.
If your business is thriving and has a strong credit score, but you'd rather not tangle with the bank or go through the process of applying with the SBA, this could be a great option for you. Their rates are the generally the cheapest available from online lenders and they can move much faster than traditional banks. That being said, rates are higher than you would find at a traditional bank, so keep in mind you'll be paying a bit more for the convenience.
A short-term loan can be useful for bridging the gap for immediate funding needs. You can qualify in just a few days and these types of loans rank as some of the most accessible financing options available to small businesses.
Less-stringent eligibility requirements and super fast times to funding come with a price, though. These loans can have very high APRs. In fact, they're some of the most expensive loans on the market. But remember to look at the whole picture and check the total payback amount on these loans. If you're comparing two different loans, using both APR and total payback amount will help you identify which is best for your situation.
If you qualify for a short-term loan, make sure you have the funds to pay it back and know exactly how it will affect your cash flow.
The revolving nature of a line of credit can be really beneficial to a business that needs regular help with financing. In many cases, as long as you're paying down your balance consistently, there is no need to reapply and you can continue to draw against your total credit limit.
While lines of credit can come with tough eligibility requirements, some online lenders, like Kabbage and BlueVine, are offering easier access to this product.
But if you don't meet the qualifications for a line of credit, don't fret. You could also consider a business credit card, which will provide you with similar flexibility but doesn't require so much hoop-jumping.
Any type of revolving credit is a great tool for small businesses to have on hand, even if you don't have an immediate need for financing.
If your financing needs are tied specifically to your company's need to purchase updated technology or equipment, there are asset-based loans designed just for this purpose. The asset you're looking to acquire serves as collateral for the loan: it is a win-win for both you and the lender.
If you're considering equipment financing, it's key to consider how long you'll need the piece of equipment compared to how long it will take for you to pay for it. If you're in a business where equipment technology evolves quickly, you could end up saddling yourself with an outdated machine that you paid above cost for. In this case, leasing may be a better option for your business. But if you know the machine will last for a significant amount of time, financing it is a great way to remove the burden of upfront cost.
If your customers aren't paying in a timely manner, invoice financing may help you make ends meet. This type of financing is achieved by the lender advancing your business roughly 80–85% of the total value of your outstanding invoices. When the customer pays, the remaining percentage is disbursed, with fees assessed and subtracted.
While it might be appealing to have the assurance of being at least partially paid for all of your invoices upfront, the reality is that this type of financing inevitably affects your business's ultimate profitability, as you won't be receiving the full payment for the product or service you provided.
If you need cash immediately, a merchant cash advance can be a viable option (albeit, an expensive one). Approval is fast and no requirements for heavy documentation can certainly make cash advances appealing. Rather than a set interest rate and repayment period, the advance is paid back through a daily draft of a percentage of your credit card sales. So, while you're never punished for slow periods, the draft amount can vary drastically based on your actual sales.
The biggest con of this type of funding is the ultimate cost. Since cash advances aren't technically considered loans, the firms putting up the financing aren't bound by the same regulations on interest rates that traditional lenders are. They are, hands down, the most expensive financing product on the market. While they might make sense for some scenarios, you want to be sure to shop options if you have time before committing to this kind of financing.