You can’t start a new business without securing financing. All businesses require financing. Consisting of money and/or credit, it will allow you to hire employees, purchase inventory and cover all essential operating expenses. Understanding the available financing options will allow you to choose the right financing vehicle for your business.
Small Business Administration (SBA) loans are a popular form of business financing. They are backed by the U.S. SBA. If a borrower defaults on an SBA loan, the SBA will reimburse the lender up to 75% of the remaining balance. SBA loans are only available to businesses with fewer than 500 employees, and businesses must not exceed $7.5 billion in average annual revenue.
Common types of SBA loans include:
- SBA 7(A)
- SBA Express
- SBA 504
- SBA Microloans
- SBA Disaster
- SBA Community Advantage
Traditional Bank Loans
In addition to SBA loans, there are traditional bank loans. Both SBA loans and traditional bank loans are offered by banks. The difference is that SBA loans are backed by the US, whereas traditional bank loans are not.
Because they are backed by the SBA, SBA loans often have a lower interest rate than traditional bank loans. On the other hand, traditional bank loans have faster approval times. If you’re looking for a fast financing option, you may want to choose a traditional bank loan.
Most forms of financing fall under one of two categories: debt or equity. Debt financing consists of loans, meaning you’ll have to borrow money from a lender. Equity capital consists of investments in which an investor or investment firm purchases a slice of your business. The investor or investment firm will then become a partial owner of your business.
Venture capital is classified as equity financing. You don’t need to go public with your business to secure venture capital financing. Even if your business is privately traded, you can sell an ownership stake in it to an investment firm. Investment firms that specialize in new businesses are known as venture capitalists.
There’s also crowdfunding. Of all the financing options listed here, it’s the newest. Crowdfunding didn’t gain momentum among entrepreneurs until recent years. What is crowdfunding exactly?
Crowdfunding is a financing option that involves small, micro-sized investments from a large pool of individual investors. Private investors pool their money together — typically through a crowdfunding website or platform — to invest in new businesses.
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