Types of small business financing you should know


Starting a business is the perfect opportunity to achieve financial stability. No matter what industry you are in, the results will come if you focus, discipline, and hard work. Obtaining the necessary resources to start this adventure can be complicated. Still, this process will become easier with the right advice.

One challenge that all entrepreneurs face is obtaining capital to start their business, no matter how small it is. And this does not change later because you will need new investments to grow or face a crisis once you initiate. The best thing to do is to be prepared and know the resources available to cover these needs. In the U.S., only 49% of small businesses feel their financing needs have been met, according to the Small Business Credit Survey 2020. Hence, you are not alone in facing this challenge.

There are several ways to obtain financing for businesses, from personal resources, family and friends’ loans, angel investors, and different types of small business loans. How to choose the right option for you? Define the purpose of the capital, your payment possibilities, the resources you have. Once you get this information, research the options available for you. To help you clarify your ideas, we share some of the most common doubts regarding financing.

Why business financial is necessary

According to Entrepreneur magazine, one of the ten reasons businesses fail is to control expenses and incomes. Having a good financial management structure within companies, regardless of their size, is essential to achieve profitable and scalable entrepreneurship. This generates more significant benefits for all involved.

Gather your financial statements, perform data analysis and define your objectives based on them. It will be easier to understand your company’s needs from the indicators and establish the areas in which you will have to invest. Numbers do not lie and are the best allies when making decisions.

Importance of choosing the right financing

These are some alternatives for financing and obtaining capital to achieve your objectives. Be sure to analyze the pros and cons according to your needs and possibilities.

Types of business financing

1-. Personal savings and friends and family loans

56% of small businesses have financed their projects with personal savings and loans from friends and family in the last five years. The reason is straightforward: they do not have interest rates and, if they do, are considerably lower and more flexible than those offered by financial institutions.

2-. Traditional bank lending

Obtaining financing through traditional banks is common for large companies and white ownership firms. These institutions often reject small businesses due to having too much debt already (44%), a low credit score (36%), insufficient collateral (33%), a bad credit history (30%), and weak business performance (18%). In short, these types of banking institutions are not small business-friendly.

3-. Angel investors

Angel investors are individuals who decide to inject capital into companies with high growth potential. In general, this resource is focused on innovative companies with well-established administrative and operational structures.

One of the most relevant advantages of this alternative is that in most cases, the investment is accompanied by advice and support so that the company’s growth is exponential, i.e., smart money.

4-. Crowdfunding

This alternative involves fundraising through specialized digital platforms. Most of the companies that resort to this instrument are those with social commitment or within the cultural, sports, and artistic sectors. A common practice in this model is to offer some benefit or reward in exchange for contributions.

5-. Small business loans

Loans are one of the external financing resources most used by small businesses (54%). These products are offered by online lenders and have lower requirements than those established by larger banking firms. The application and approval processes are fast and straightforward. In some cases, the capital is delivered in less than a week. They are an excellent possibility for early-stage or minority-owned businesses.

What type of loan is best for small businesses?

Before applying for a loan, do thorough research. Some financial institutions have loan calculators on their websites so that interested parties can find out the interest rates, monthly payment installments, and the amount of financing they can get, according to their payment possibilities.

After making this projection, check the requirements to access the loan. Some lenders will accept credit scores above 550, less than one year of business operation, and less than $50,000 in annual revenue. These characteristics open the panorama for many small businesses and allow them to access the necessary financing to achieve a solid business.

How to decide which business loan is for your business

Before applying for small business loans, consider these aspects, but mainly, define the sources of income that will allow you to pay the loan. This way, you will avoid delays in your payments that could affect your credit score. Approach financial institutions that clarify all your doubts and provide advice and support throughout the process.

Forming a healthy and long-term relationship with financial institutions is fundamental to obtain more capital in the future. Financing is the best ally of a company’s growth. Plan, budget, research, and make the best decision for your business, according to your needs.

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