With the plethora of options available to business owners, it can be sometimes tricky trying to make sense of business funding. One of the commonest questions in the business world is funding for businesses. While the question might seem relatively easy, it is not as straight-forward as perceived and below are some of the ways businesses are using the available funding options to grow and expand.
Factors to Consider when choosing business funding
Will the lending institution pull personal credit score?
While the funding is being sourced for the business, some lending institutions and products sometimes rely on the business owner’s personal credit to approve an application. In a similar vein, such lenders report issues to the credit bureaus for penalty in case of a default.
Will the customers be contacted?
Funding options such as invoice factoring give businesses money up front for unpaid invoices, subsequently requiring customers to pay them back directly – not the business. This act might be misconstrued by customers, with the perception that the business is in financial crisis.
Is the lender giving more than required?
While this might sound like a good problem for businesses, getting a huge term loan for more money than needed, can add up to a lot of unnecessary interest payments as interest will be paid on the entire amount.
How are the fees charged?
It is important for business owners to keep an eye out for fees such as origination fees, subscription fees, maintenance fees, and prepayment penalties. Such fees are often charged in addition to the interest rate and can be sometimes hidden.
What is the risk of getting into a debt spiral?
Some financial products allow borrowers to extend their debt past the final term period, adding fees to the interest already owed, consequently creating an ever-increasing debt that can be very hard to pay down.
Financing options available to small businesses
Traditional Bank Loans
Business Lines of Credit
Merchant Cash Advances
Loans from the Small Business Administration
Borrowing from friends and family