Small businesses drive the American economy. According to The Small Business Administration, small companies represent 97 percent of American employers and provide employment for over half of the U.S. workforce. At the same time, the funding needs of different small companies have proven as diverse as the types of companies that are defined as small businesses. In addition, it is difficult for some kinds of companies to get approved for funding by traditional lenders. Business owners may need to consider a variety of funding options to find the one that works for their unique company.
Small Businesses and Funding Needs Vary Widely
According to the Harvard Business Review, small businesses can be broken down into these major types:
- Out of almost 30 million American small businesses, about half are based at home.
- About 23 million run as sole proprietorships.
- The Harvard Business Review divides the rest up into mom-and-pop businesses, suppliers for large companies, and startups.
The fact that these businesses operate in many different industries makes defining good sources of funding even more complex. A local cafe, product distributor, and an eCommerce website may have vastly different funding needs and, of course, different available sources of ready credit.
Compare Funding Options for Your Business
Individual business owners might consider some common business funding options to determine which ones will provide their own company with the capital that they need:
- Small Business Administration Loans
Contrary to common belief, the SBA doesn’t actually loan businesses money. They do have loan programs that may make it easier for some companies to obtain financing at reasonable rates from traditional banks. Lenders may approve more loans obtained under one of these programs or offer more modest rates because the Small Business Administration offers a partial guarantee.
Typical SBA loan programs do not favor startups or companies in certain industries. Typically, a business has to have a few years’ worth of financial activity and a certain amount of owner equity. The SBA Microloan program, which limits financing to $35,000, offers one exception because it friendly to startups.
- Traditional Banks
Bank lenders tend to favor companies that have been in business long enough to establish a solid credit history in the company’s name. The process may require substantial documentation and take weeks to actually fund the businesses they do approve.
If a bank or credit union does approve a loan, they may be for a fixed amount. Generally, banks offer reasonable interest rates for loans they do approve. Local banks and credit unions have proven more generous with small-business funding than larger banks recently. It might help to have a relationship with the bank.
- Business Credit Cards
Businesses with decent credit can take advantage of a lot of attractive business credit cards. Some offer introductory rates of 0 percent for periods that can last several months. In addition, credit card perks may appeal to some business owners. These could include discounts with partners and airline miles.
The best card offers only go to businesses with established credit. Also once the introductory period ends, some of these cards revert to high, double-digit interest rates and charge yearly fees just to keep the account open. Also, credit limits are likely to be fairly modest and limit cash advances, so their use is limited to mostly just making purchases. While many business owners find a credit card convenient, using one requires a good credit management plan.
- Online Lines of Credit
Many companies can benefit from funding via a business line of credit. Companies may get approved for a credit limit of $2,000 up to $100,000. Better yet, this funding goes directly into a bank account, so it isn’t just good for purchases as credit cards are. Business owners can apply for these online lines via the internet, enjoy quick approvals, and get funded very fast. Since business owners can draw funds out of their line of credit as they need them, this type of loan may offer more flexibility than a fixed loan from a bank.
Since online lenders employ online technology to approve applications, they may draw upon alternative sources of data about a company than the type of credit reports that banks use. Rather than only relying upon credit reports, online lending companies can use data from charge receipts, online retailers, accounting software, and even social sites. Companies that may get declined by a credit card company, bank, or even for an SBA loan may find they can get an approval with an online lending platform.
Which Business Funding Options Work Best?
Typically, the worst funding option is one that doesn’t give a company the financing that it needs to pay bills and grow. That means business owners should explore which programs that they would be likely to qualify for. They also need to determine which kind of loan offers the fairest terms and most convenience. In some cases, needs may change. So this choice should be evaluated periodically in light of the company’s growth and needs.