You've done it, you've achieved the dream — you own your own business. But now the hard parts come into play — developing a solid business plan, handling sales and marketing, and then facing the dreaded finance problem. Where do you start?
It's important to take a look at the various options available to determine which best suits your type of business and the situation you're facing.
A/R Based Loans
Accounts receivables financing. This is a financing arrangement where you can use your receivables as collateral. Your company will receive an amount that is equal to a reduced value of the qualified receivables pledged. Advanced technological methods are now available that can easily transfer your accounting information to the bank for quick approval.
Best for: Short-term cash flow needs.
Business Loans
A loan specifically intended for business purposes. Debt is created and must be repaid with added interest according to the loan's terms and conditions. This borrowed capital can be applied toward expenses that you are unable to pay such as salaries, office supplies, or inventory.
Best for: A company that has a good history and a less risky position in the market. When you need capital to finance a specific business project.
Factoring
A transaction in which you can sell your accounts receivables, or invoices, to a "factor." This factor is a third party commercial financial company that you can receive cash from. Typically, it's available to you more quickly than waiting for a customer payment and the advance rate can range from 80% to 95%, depending on the industry.
Best for: When you need more flexibility than a traditional bank loan provides. When you need cash flow fast — factors get you cash in advance for selling your invoices, sometimes even within a 24 hour period.
SBA Loans
A loan for businesses, financed by banks who participate in Small Business Administration financing. It may be easier to overcome the bank's strict credit criteria because the SBA guarantees a percentage of these loans. You will need collateral to secure the loan and must have your credit and financial statements reviewed in the process.
Best for: Entrepreneurs who want to improve their small businesses with small business loans, have a strong description of loan intentions, good credit, and show a demonstrated ability to repay the loan.
Regardless of which loan you choose to pursue, the tools you can use to apply are getting smarter and easier. Your personal finance record, credit history, work experience, and character can all play a role when applying for finance options. Having your own equity invested in the business can strongly work in your favor. Lenders are looking for clues that your business can pay them back, plus interest.