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Originally Posted On: https://outofyourrut.com/looking-for-funding-how-to-finance-a-new-business/
Nearly 20% of businesses fail in the first year, and 30% in the second year due to cash flow problems.
The cash flow problem arises from high expenses, low revenue, and probably, inadequate business management expertise. When the funds get low, it becomes necessary for young firms to seek extra sources of finance to prevent collapsing.
Luckily, there are many alternative funding options for small businesses. If you are planning to start a business this year, here are helpful tips on how to finance a new business without further debt.
How to Finance a New Business in Seven Steps
The process of securing loans is not always easy. However, you can overcome the hurdles and get a reliable business loan using the tips below:
Understand Why You Need the Loan
You should have a good plan as to why you need the loan. When you have a good idea, you will channel the funds into the right place and avoid unnecessary spending.
Besides, your lender will need to know why you need the money. The main reasons why you could need the cash include:
- To add your inventory/stock
- To manage your daily expenses
- Get a safety cushion for your future purchases or expenses
- To invest in marketing processes
- Hire more employees
- To pay an existing debt
Do not take a business loan for your personal needs.
Improve Your Credit Score
The loan applicants with a higher credit score have a better chance of securing a business loan. Some lenders may not consider the score, but it can increase your chances of qualifying.
You can improve your credit score by paying your bills on time. You can also boost the score by separating your personal and business funds and regularly checking your score for any mistakes.
Compare Different Lenders
The lending terms and conditions vary significantly between lenders. Some lenders, for instance, offer high-interest rates and reduced loan amounts. Also, some lenders have flexible payment terms when compared to others.
To get the best, compare three or more lenders. After that, narrow down your options according to your personal needs.
Understand the Ideal Business Loan
Your reason for the loan will dictate the best loan you can get. Ideally, young businesses have limited funding options. This is because they still do not have a consistent flow of income, which would convince the lender.
In this stage, you may only rely on credit cards, crowdfunding, microloans, personal loans, and so on.
You may also consider the business line of credit or SBA loan if your business is more than a year old. Understand the viable options for you so that you may make an informed decision.
Know What the Lenders Want
The lenders’ requirements vary greatly. Banks, for instance, require many things, including an excellent credit score. Their interest rates, however, tend to be relatively lower than the others.
The other short-term business financing options require a few things, but the interest rates are high. If you are looking for a long term lending option, you will need to meet the minimum requirements.
Prepare Your Business Documents
Financial lenders require businesses to produce their business documents. These documents provide evidence that the company genuinely exists and can qualify for a loan.
The primary documents that you should gather include your business plan, business permits, and balance sheets.
You may also provide the accounting sheets and your invoices if you are applying for the invoice factoring.
Prepare the Asset or Down Payment
For security, many lenders ask the borrowers for an asset. The asset could be your business or any valuable thing in your business.
Besides the security, the lender might ask you to provide the down payment to qualify for the loan. The down payment mostly applies for equipment financing whereby you need the lender to finance your purchase of business equipment.
Main Types of Business Loans
Here are the common types of loans suitable for growing businesses. As mentioned earlier, the qualifications terms and interest rates vary significantly. Review each option carefully to choose the ideal one for your new business.
Payroll funding is an ideal lending option for relatively new businesses that need finances to make their payroll.
Ideally, the company should have been in existence for one year and should have ready invoices from its slow-paying clients. For instance, if your clients usually pay after thirty days, you may use their invoices to get a loan before the thirty day period elapses.
The lending firm reviews the invoices carefully and calculates the best amount you may qualify for. After that, the lender buys the payrolls, meaning that the client’s payments will be credited directly into the lender’s account.
The loan amount you get is usually slightly lower than the amount you expect to get from the receipts. The method, however, is quite beneficial for businesses with emergencies.
To grow your business with payroll funding, you should have viable invoices. Your business credit score should also be excellent. You will even stand a better chance of qualifying if you offer your services to other businesses or the government.
Invoice financing is quite similar to the invoice factoring. Here, the borrower uses their invoices as collateral. Unlike the factoring option, you don’t sell the receipts, but rather, you only use the invoices as security for a short period.
The lender reviews the receipts, and then makes an offer for the loan. All the receipts should have a minimum payment period of thirty days and a maximum of 90 days.
Your business credit score should also be high. If you qualify, you will provide the receipts to the lender, and then receive the loan as per your agreements.
This is a short term lending option, so you should only use it for short-term business needs.
Merchant Cash Advance
A merchant cash advance is another short term lending option that businesses consider as they find a better long term financing option.
This lending option only works great for business with a considerable amount of stock. This is because the lender considers the capital you have in your business to give you the loan.
If you meet other requirements, the lender will visit your firm and review your stock. After that, they will add up the process to know the possible value of the inventory. After that, they will offer you a loan amount equivalent to your stock.
In short, the merchant cash advance allows you to get a lump sum or an advance payment for your inventory. When you get the loan, you will be channeling all your business earnings to the lender in return.
Small Business Loans (SBA)
SBA is a lending program whose aim is to support young and growing businesses.
Unlike many lenders, the SBA loan programs offer competitive rates to motivate young businesses to apply. The payment rates are also flexible when compared to other financial institutions.
The government backs the SBA loans, and that’s another reason for the favorable lending rates.
You may access these loans through any bank in the United States, which is registered in the SBA program. These programs include SBA 7(a) loans, 504 (a) loans, and the Microloan SBA loans. Each option has a different amount and has its requirements.
Besides the loan, the SBA loan initiatives advise the borrowers on how to use the funds. The interest rates are fixed, and the repayment period is more extended, with some going up to 25 years.
The term angels refer to senior investors. These are already established business people who are willing to support startups.
Unlike financial institutions, angel investors do not consider your credit history. This means you may qualify for the loan even when you have bad credit.
When you approach the angel, you will give them your business proposal, and a few documents they might ask for. After that, they will review your business carefully to see if it has the potential to succeed.
If you qualify, they will offer a lump sum, which may go up to $1,000,000 according to your needs and business size.
In return, the angel investors supervise the business. They might even join your board of directors to ensure that you manage the company well and use the funds wisely.
Most angel investors maintain a low life profile, and it might not be easy to find them. You can, however, search them on social media, or the leading angel investors’ sites.
Grow Your Business Today With the Available Funding Options
Inevitably, businesses require funds in all stages. However, financial needs tend to be higher in small businesses. If you are planning to start your firm, start planning well on how you will manage your business to prevent early collapsing.
You should also familiarize yourself with viable options on how to finance a new business. By doing so, you will prepare yourself, build your credit score, and prepare the right documents you will need to get a loan.
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