What's the best financing for businesses?
Small businesses can often find the most affordable financing through small business loans. These loans are typically available from banks and other financial institutions and can be used for a variety of purposes like working capital, equipment purchases, or expansions. However, this type of financing can become stalled by various levels of red tape in the form of paperwork, repayment terms and the interest that’s projected for the borrowing business – all are requirements of the lengthy processes and conditions these bigger entities have to stipulate.
To curb these legacy bureaucracies, small businesses can turn to alternative sources of funding, like:- Invoice funding: Selling outstanding invoices to lenders for a lump sum.
- Peer-to-peer: Borrowing from individuals, instead of bigger institutions,
- Merchant cash advance: Borrowing a lump sum in exchange for a percentage of future credit and debit card sales,
Now, these alternative methods of funding can work out to be slightly more expensive than the traditional options. But it must be remembered that the most affordable business loan is not always the best option for your business. When considering a loan, be sure to compare interest rates, fees, and repayment terms to find the loan that is best for your business.
What are the main types of financing for a small business?
The main types of financing for a small business are equity financing and debt financing. Let’s dive into some of the advantages and disadvantages of each of these types of funding for your business.
Equity funding
Equity financing is when businesses raise money by selling shares of ownership in the company. This type of financing is typically used by early-stage companies that need capital to grow.
Advantages
- The money obtained from investors isn’t a loan, so it doesn’t have to be paid back.
- No monthly repayments means more working capital can be invested into other areas of the business.
- No pressure to ensure a thriving bottom line, or profitability, in a short amount of time.
Disadvantages
- A portion of the business must be relinquished to investors.
- The loss of control of the business, and sometimes even a boss to answer to, depending on the percentage owned.
Debt financing
Debt financing is when businesses borrow money and then repay the loan with interest. This type of financing is typically used by businesses that have already established themselves and have a good credit history.
Advantages
- The lending entity has no control or ownership.
- Paying back the loan ends the relationship with the lender but doesn’t detract from the newly established higher value of the business.
- The interest on repayments is tax deductible.
Disadvantages
- For smaller businesses, adding debt can exacerbate repayment responsibilities across the board.
- Debt financing is subject to a healthy economy – in tougher times, this type of loan will be difficult to obtain.
Are you looking for that revitalising boost? Have you done your homework, and do you know exactly what type of loan your business needs? Look no further than Merchant Capital - when you’re ready to apply, we have the small business loan that’ll help you realise your growth ambition.
