6 Finance Options for Small Businesses

Every year many small businesses fail during the first year of operation due to lack of funding among many reasons. Capital funding for small business is their lifeline. Almost every entrepreneur struggles with the question – How to get short-term business loans working capital at every stage of business?

When you would require funding depends significantly on the nature and type of the business. Here are some alternatives that go beyond traditional bank loan available for you:

Business capital loans

Business capital loans, also known as a small business working capital loan, empower small business owners to cover a wide range of contingencies. Usually, this financing option is used to pay for the operational costs, i.e. costs associated with running your business. It may include meeting the rent, payroll, or making debit and credit card payments. Working capital loans are for short-term needs. For larger expenses and longer-term investments, such as the purchase of a new building or property, there are other financing options.

For business capital loans, many small to midsize businesses turn to their banks. However, traditional financing institutions’ requirements and response times typically do not fit together with a firm’s need for immediate financial assistance. In such cases, alternative financing companies often serve as a savior for the financial requirements of small businesses.

Community Development Finance Institutions (CDFI)

There are multiple nonprofit community development finance institution to provide capital to small and micro-business owners at reasonable rate and terms. Community development finance institutions often assist small businesses in accessing the capital they need to thrive and grow. Applications of many lenders’ get rejected due to poor credit score. CDFI lenders consider the credit score but in a different way. They look for borrowers who have been fiscally responsible, but at the same time, they understand that unfortunate things happen to people as well as businesses. Job losses and personal issues negatively impact accounting, but they all can be explained to CDFI lenders.

Venture capitalists

With the system of venture capital, an outside group takes part the ownership of the company in exchange for the capital. The percentage of ownership to capital, which majorly depends on a company’s valuation, is negotiated between both the parties. It fits only when there is high expected growth potential and a competitive edge. There are many benefits of going with this alternative, for example, chances of receiving more than just capital because some firms provide entrepreneurs additional resources, like hands-on assistance from the firm’s network of advisors and accelerators.

Crowdfunding

Some websites can give a big financial boost to small businesses. These sites enable businesses to pool small investments from different investors rather than seeking out a single investment source. However, if you are considering opting for this option, read the fine print available on their website. Some sites have payment processing feels or need businesses to raise their financial goal to raise any money.

401(k) financing

If you have some work experience, you may dip into your 401(k) retirement savings to fund your business. You can even accept 401(k) payments from friends and family if they are willing to donate. The best benefits of this financial tool are tax benefits. However, the cost of this business financing is risky considering the fact that if your business fails, your retirement fund goes down with it. Think the pros and cons before you land to an option. Hire a tax attorney to help you navigate the option.

Angel investment

Angel investors are individuals with surplus cash along with a keen interest to invest in small businesses and startups. They work in a group of networks to collectively screen your proposals before they decide to invest. Sometimes, they also offer mentoring or advice alongside capital. Angel investors have funded and helped many prominent companies to be grown, including, Google, Yahoo, and Alibaba. This alternative form of investing is required only in a company’s early stages of growth with investors expecting equity up to 30%. They may also take more risks in investment for higher returns.

If you need a smart and instant financial option, you may need to go beyond traditional options. Make sure that you have weighed down pros and cons of your funding option before you sign up anything.