Financing a Small Business: Your Questions, Answered

small business financing

One of the early steps in financing a small business is to identify avenues for acquiring capital. These can include–but are not limited to–a business loan, venture capitalist funding, or crowdfunding.

Depending on your businesses’ model and goals, capital may be critical to your success. However, as much as an influx of capital helps to grow your business in the short term, you also become beholden to the stakeholders of that loan or investment. This means those entities become key parts of your ongoing considerations, such as paying off a loan or keeping your investors briefed on quarterly progress.

Fortunately, financing a small business brings options. As long as you ask yourself the right questions and set yourself up for success by thinking critically, you have several ways to go. 

FREQUENTLY ASKED QUESTIONS

Question: How do I know if I need financing?

Answer: Your business model will likely determine whether you need to seek financing. Certain small businesses, such as service-related and online companies, can grow through grassroots efforts and avoid going into debt. If your business model requires an initial degree of overhead—such as manufacturing, distribution, or a need to bring on employees right away—then financing may be crucial.

Question: Can any small business get a loan?

Answer: It takes a little bit of homework before you can seek a small business loan. Here’s a quick guide:

  • Check your credit score: Knowing your credit score will help you better understand your financing options with lenders.
  • Determine how much you think you need: Whether in your five-year plan, growth projections, or P+L (profit and loss) sheets, understand how much you actually need to achieve the goal that’s driving you toward a loan in the first place.
  • Determine the term length of your loan: How quickly do you expect or need to pay off the loan?
  • Factor in APR: APR, or annual percentage rate, is the interest charged on your loan each year. This is how lenders make their money. When you’re getting a small business loan, the lower the APR, the lower the total cost of the payoff amount. 
  • Consult a Professional: It is always in your best interest to consult a professional about your unique circumstance—as each small business has its own unique challenges—and financial needs.

Question: What is the most common way to get a small business loan?

Answer: The three most common entities that issue small business loans are banks, microlenders, and online lenders.

Banks: You probably know that banks offer loans. But as a small business owner, a bank might be one of the tougher places to acquire your startup cash. Banks often like to see two things in borrowers: good credit and the ability to provide collateral to secure the loan. This sometimes creates a barrier to entry to small businesses, in which the principal of the company doesn’t yet have collateral, such as real estate, or doesn't have established credit that the bank finds desirable. Banks do tend to have the lowest APR, but they often take the longest time to process a loan from start to finish. If your business is in dire need of capital right away, you may consider starting elsewhere.

Microlender: Microlenders are nonprofits that offer low (less than $35,000) and short-term loans to businesses. Small businesses usually look into microlenders after striking out on a traditional bank loan. Microlenders require a detailed plan of action for your business as well as financial documents and a statement of intent for how the funds will be used. This can be a lengthy process in itself, but one that usually allows the small business to be issued a loan, despite having less-than-ideal credit and/or no collateral.

Online lenders: Online lenders bring along a few challenges. Unfortunately, these loans can have a very high APR, but have been known for helping to provide fast solutions with a fast turnaround time for acquiring the necessary capital. This helps make online lenders a quick cash solution (especially during tough financial times). An online lender can work well for your business if you borrow only what you need and are able to pay back quickly. But it’s important to also remember that the conditions of the loan might not work for your business. 

Azlo’s small business lending Q&A panel provides tremendous insight on what lenders are considering when determining whether or not to issue a loan to a small business.

Question: How does crowdfunding work?

One organization describes crowdfunding as “a way of raising finance by asking a large number of people each for a small amount of money.” Although this seems like a simple concept, keep in mind that any time you borrow money, the people from whom you borrow are going to expect a return on their investment. Again, the size of your company and the needs of your loan should dictate how many people, and which types of people, you target for crowdfunding. If you choose this route, be sure to consult a professional to assess your particular situation.

Thanks to the internet, there is easy and open access to venture capitalists and online fund contributions. But unlike a bank, microlender or online lender, you are working with people who are often investing their personal wealth in order to help you achieve your goals. Therefore, being able to persuade a venture capitalist or raise enough money through an online crowdfunding source may prove more difficult than you think. Oftentimes, entrepreneurs will try to crowdfund on the side, while still pursuing a business loan from a traditional entity.

Question: What is the best financing option for a business?

Answer: That depends because every business’s needs are different. However, the acronym TEAM can help you decide what your needs are and how best to proceed.financing-a-business-photo1Lastly, don’t forget there are other ways to fund your business without getting a loan.

Admin

Hi there! This post exists to offer you (hopefully) useful information but it cannot take the place of personalized professional advice. Please consult a qualified expert if you have questions about your business. Also, Azlo doesn’t endorse any third-party sites that are linked here.

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