Understanding Your Business Funding Options

Author: Rieva Lesonsky | March 8, 2016

Whether you’re a startup business owner or a veteran entrepreneur, these days there are enough business funding options available to make your head spin. To help you weed through the myriad solutions, here are some common situations where you might need financing and the business funding options that work best for each.

Challenge: Starting a Business

You’re launching a service business and developed a thorough business plan. You’ve tapped into your personal savings, gotten some money from friends and family and have almost enough to get started — but you still haven’t scraped together all the capital you need.

Solution: If you’re looking for a relatively small amount of financing (such as $10,000 or less), try a peer-to-peer (P2P) loan. P2P lending sites match business owners with individuals looking to lend money. Post a profile stating what you’re looking for, and individuals can decide whether to loan to you or not. The online marketplace manages the loan so don’t have to worry about risk.

Challenge: Launching a Product

You’ve come up with a great product you think will be a hot seller. Now all you need is the money to get it made and market it.

Solution: One of the newer business funding options, crowdfunding is similar to P2P lending in that you pitch your concept online on a crowdfunding website to obtain money from individuals. In crowdfunding, however, you aren’t getting a loan: instead, you receive a donation to your startup for which you give the donor something in return, such as early access to your new product or “extras” such as VIP rewards. Successful crowdfunders with products that consumers really get excited about have raised hundreds of thousands of dollars.

Challenge: Purchasing Costly Business Equipment

Your restaurant needs a new pizza oven to elevate its menu. However, the oven is expensive, and after extensive remodeling you don’t have the cash on hand.

Solution: Look for an equipment financing company—these firms specialize in financing business equipment. Or, work with the company that sells the equipment: Many offer their own financing programs. Like auto dealerships, they have a vested interest in financing your purchase so they can make more money from you.

Challenge: Managing a Seasonal Business

Your construction company does most of its business in the fall, spring and summer—but in winter, when business slows down, you still have overhead and bills to pay.

Solution: A business line of credit is one of the best business funding options when companies need to get through slow sales seasons. As with a home equity line of credit, you can tap into the capital as needed, up to the amount of the credit line, and don’t have to pay money back until you actually borrow. Credit lines are the perfect solution for companies with built in ups and downs.

Challenge: Slow-Paying Customers

Are your customers large corporations or government agencies that typically take 90 days or more to pay your invoices? This can put a major crimp in your cash flow.

Solution: Invoice financing helps companies get their cash flowing again by providing advances on invoices. Sell whatever invoices you want to the invoice financing company for an immediate advance on the amount due. This solution is ideal when you know the customer is good for it—just not right away.

Challenge: Fulfilling a Big Order

You just got a large order from Walmart—so large, you don’t have the cash to buy the materials needed to fill it.

Solution: Use purchase order or invoice financing. If you’ve got an invoice in hand, the financing company will advance you the money you need to manufacture or buy your product.

Challenge: Buying a Building

The location you’ve rented for 5 years just went up for sale, and you really want to buy it.

Solution: For long-term purposes like purchasing commercial real estate, a traditional bank loan works best. It offers lower interest rates and longer terms than most alternative forms of financing. SBA-approved lenders offer SBA 504 loans specifically for buying fixed assets, such as buildings.

By matching your financial challenge to the appropriate solution, you’ll be able to choose the business funding options that work best for you.

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