Choosing the Right Financing Option for Your Small Business

You can’t expect your small business to stay afloat with financing. According to the U.S. Small Business Administration (SBA), nearly half of all small businesses fail within their first five years. Statistics such as this can be disheartening for aspiring business owners, but you can gain a competitive advantage with the right financing. Here are some of the different financing options from which you can choose when running a small business.

Bank Loan

When most entrepreneurs think of financing for a small business, they envision bank loans. Bank loans are a form of debt financing that, as the name suggests, are offered by banks. Some of them are secured, whereas others are unsecured. Secured bank loans are backed by collateral. Unsecured bank loans are not backed by collateral. Regardless, if you’re looking for a quick and easy financing option for your small business, you may want to choose a bank loan.

SBA Loans

There are SBA loans available for small businesses. SBA loans are offered by banks as well, but they are backed by the SBA. What does this mean exactly? If you default on an SBA loan, the government will reimburse the bank that provided you with the loan. More importantly perhaps, SBA loans are available in longer terms and more flexible interest rates than traditional bank loans.

Line of Credit

Another financing option to consider for your small business is a line of credit. It’s similar to a bank loan. Both bank loans and lines of credit are forms of debt financing, and they are both offered by banks. The difference is that a line of credit is revolving, whereas a bank loan is not. Lines of credit are revolving in the sense that you can continue to draw money from them as long as you stay within the limit. With a bank loan, on the other hand, you’ll receive a fixed lump sum of money, which you’ll have to repay according to the bank’s terms and conditions.

Invoice Financing

While not as common as loans and lines of credit, some entrepreneurs use invoice financing for their small businesses. Also known as factoring, it involves selling accounts receivables invoices to a third party at a discount. The third party will purchase the invoices at a lower cost than their face value. If an invoice is worth $100, for instance, it may purchase the invoice for $80 to $90. Invoice factoring is a viable financing option for small businesses that send their customers or clients invoices.

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