Startups and small businesses have more funding options available now than ever before.
If you’re looking to start a business in 2020, then how you’re going to fund your business should be one of the first things on your mind. However, finding and locking down funding for a brand-new business can be notoriously difficult.
The Small Business Administration (SBA) typically offers business loans with the best terms and interest rates. Unfortunately, there’s a reason for this. The qualifications to get an SBA loan are very strict, including a minimum number of years in business and revenue generation requirements, among other factors. This makes SBA loans some of the most difficult funding to get as a small business, not to mention if you’re trying to just start a new business.
Big banks tend to have requirements similar to the SBA, if less stringent. Term business loans from big banks also tend to require time in business and revenue to qualify. These stipulations present a Catch-22 for the startup businessman because it inherently cannot meet these requirements — he or she is trying to start the business in the first place.
Therefore, it hasn’t been in existence and hasn’t generated revenue. Existing small businesses too can have difficulty getting a business loan from a big bank simply by falling short of their requirements for revenue or minimum time in operation. And, of course, there’s always your credit score and history that can undermine your chances.
Fortunately, nowadays your options for securing business funding is much wider than it used to be. Here’s a look at some great options you can pursue in order to get funding for your business in 2020.
1. Personal and Business Credit Cards
Using business and personal credit cards to fund your business is a convenient source for people who haven’t started their business yet. When applying for personal or business credit cards, you don’t have to show minimum time in business or amounts of revenue generated. To get approved for a business credit card, you may have to have established business credit, which, if your company hasn’t started yet, you won’t have. Personal credit cards, however, only require your personal credit profile.
Many small business funding companies specialize in credit card financing for startups and new businesses. It provides a method of funding with one of the highest approval rates across all types of lenders, from traditional banks to online lenders. Using personal and business credit cards is one of the few accessible ways that startups or yet-to-be-founded businesses can get funding.
2. Invoice Factoring and Invoice Financing
Invoice factoring and invoice financing are methods of securing capital using unpaid invoices your business is waiting on to receive. In both types of funding, your outstanding accounts receivables serve is the collateral that you borrow against. However, there are some key differences.
With invoice factoring, you actually sell your outstanding invoices to the lender, who then takes over accepting payments directly from your customers or clients. With invoice financing, also called invoice discounting, you borrow against your receivables, but don’t sell them. You still collect payments from your customer or client, not the lender, and when clients pay their invoices, you repay the lender.
These methods of business funding have the advantage of putting less emphasis on your business and personal credit profiles in the approval process. Rather, their focus is on the quality of your receivables. Of course, as with other forms of lending, having a borrower with a better credit profile tends to result in better terms.
But there’s a big thing to be aware of with using invoices for funding. With invoice factoring, the interest and fees are not represented as an interest rate or APR. This is because the borrowing rate is a factor rate, which means, rather than being denoted in percentages, it is described in terms like 1.2 or 1.5 factor rate. What this is really saying is that the borrowing rate is not 1.2% or 1.5%, but 120% or 150%. The expensive nature of invoice factoring is its main drawback. That being said, both invoice factoring and invoice financing can provide you with quick funds to meet cash-flow needs that would otherwise put your company in a dire position.
3. Merchant Cash Advance
Using a merchant cash advance to get funding is a great route when you need the money immediately. It’s a solid solution for when your business has contracts it’s working on, but is in need of cash right now. The promise of work and future payment in your business contracts can be used to get funding via a merchant cash advance.
A merchant cash advance is not a loan. Like its name suggests, it is an advance of money that a lender gives your company in exchange for taking your future credit and debit card sales for an agreed length of time. This is where contract work is beneficial since it’s pretty much guaranteed future income for the merchant cash advance company, so it makes sense for them to advance you the funds. But a merchant cash advance can be done based on any company’s anticipated future credit and debit sales, it doesn’t need to be contract based.
The main benefit of a merchant cash advance is that your personal and business credit score means very little. The main criteria for companies to advance you funds is your cash flow. If your credit is poor, but your business has consistent cash flow month over month, then a merchant cash advance could be a sound solution for immediate cash needs. The main drawback of merchant cash advances is their cost. They are very expensive compared to traditional business loans. This is chiefly because, like with invoice factoring, a merchant cash advance has a factor rate rather than a conventional APR represented in percent. Factor rates tend to be much higher than traditional business loan interest rates. However, the quick funding and minimal credit requirements of merchant cash advance makes them an attractive option should your business need cash now.
