Funding Options for Business Owners
You’ve launched your business, and things are looking great! You’re seeing steady growth, gaining loyal customers, and your financials are in the green. Just when you think you’ve hit your stride, an unexpected expense pops up—a major equipment breakdown, a delayed payment from a large client, or perhaps a surprise building repair. Now, you need cash fast, and you’re scrambling to figure out your funding options as deadlines loom.
Take a breath! Sudden expenses are a normal part of running a business. Fortunately, you have a range of funding options available. Here, we’ll explore the key options that can keep your business on track when unexpected expenses arise.
Investments and Grants
Angel Investors
Angel investors are individuals who invest their own money in promising businesses in exchange for ownership equity. Unlike banks, which loan you money and charge interest, angel investors buy a stake in your company, hoping to profit if your business grows. These investors are often experienced entrepreneurs who provide funding and advice to help businesses succeed.
Finding an angel investor usually involves pitching your business idea to potential investors, often through angel investor networks or personal connections. The process includes several steps, like introductory meetings, business presentations, document sharing, and negotiations. Securing funds from an angel investor can take several weeks to months, depending on the investment size and your business complexity.
Grants
Grants are essentially “free money” given to businesses that meet certain criteria. Government agencies, corporations, and nonprofit organizations offer grants to help businesses grow. You’ll need to find a grant that aligns with your business type, and competition is often fierce. Applying for a grant usually involves filling out applications and making a strong case for why your business deserves the funding.
Grants often come with specific requirements regarding how you can use the funds. If you fail to comply, you may need to repay the grant. To increase your chances, consider applying to multiple grants, but be mindful of the time commitment involved in the application process.
Short-Term Funding Options
Line of Credit
A line of credit provides you with a set amount of money you can draw from as needed, up to a pre-approved limit. You only pay interest on the amount you actually use, making it a flexible option. Lines of credit are useful for projects where expenses are uncertain or for covering unexpected costs.
For instance, if you’re renovating your business premises but aren’t sure of the final costs, a line of credit lets you pay for expenses as they arise without taking out a large loan. However, be cautious—lines of credit often come with variable interest rates, so your monthly payment could increase. Also, easy access to funds can lead to over-borrowing, which increases your debt and monthly interest payments. Be aware of any maintenance or transaction fees as well.
Credit Cards
Business credit cards provide revolving credit, meaning you can borrow up to your limit, repay it, and borrow again. Credit cards can help build your business credit score, which improves your chances of securing future loans at better rates. Credit cards are best used for smaller purchases, like inventory, that you can quickly repay. High-interest rates make them unsuitable for long-term financing or large expenses that will take months to pay off.
Bridge Loans
Bridge loans offer quick, short-term financing to cover immediate needs while you await long-term funding. These loans have a shorter approval process but come with higher interest rates, upfront fees, and shorter repayment terms. As the name implies, they serve as a “bridge” over financial gaps, providing the funds needed to meet short-term obligations until you secure more permanent financing.
Bridge loans are based on your revenue, credit score, and available collateral. If approved, funds can reach your account in about a week, making it a quick option to keep operations running.
Medium-Term Funding Options
Working Capital Loans
These loans help cover everyday business expenses, such as payroll or inventory. They’re particularly helpful for seasonal businesses that need funds during off-seasons. Working capital loans are typically collateralized, meaning you must offer an asset as security. Unlike bridge loans, which cover immediate cash gaps while you await funding, working capital loans are usually medium-term and geared toward regular business operations.
Long-Term Funding Options
Traditional Bank Loans
Bank loans are the most common form of long-term financing. After you apply, the bank assesses your credit score and evaluates your collateral to determine the loan terms, including the interest rate and repayment schedule. Bank loans may specify how you must use the funds, such as for equipment purchases or real estate investments. They’re best for significant, long-term expenses and can provide a stable source of financing.
Small Business Administration (SBA) Loans
SBA loans are designed to support small businesses with lower interest rates and business counseling services. The SBA partners with approved lenders to offer a variety of loans, with the 7(a) loan being the most popular. The 7(a) loan can be used for real estate, equipment, refinancing, and more.
For example, if you’ve taken on high-interest credit card debt, refinancing it with a 7(a) loan at a much lower interest rate could save thousands. Suppose you have $10,000 on a credit card with a 20% interest rate. You’d pay $2,000 in interest in the first year alone. Compare that to an SBA loan at 6.5% interest, and you’d save over $1,350 in interest the first year.
During national emergencies, the SBA may also offer disaster relief loans, like the Paycheck Protection Program (PPP) loans during the COVID-19 pandemic. PPP loans provided small businesses with low-interest funding to cover payroll, rent, utilities, and other essential costs at an unbeatable rate of 1%.
Which Funding Options are Right for You?
Choosing a funding option for your business is a big decision with long-term implications. You might have to give up partial ownership, risk your assets as collateral, or face restrictions on how you can spend the money. The right choice, however, can keep your business moving forward.
At Volpe Consulting & Accounting, we’re here to guide you through your options, helping you make a choice that keeps your cash flow strong and your business thriving.
