As any company owner understands, finding the right borrowing options for businesses is imperative. A source of funding at the right time helps the owner take advantage of opportunities to make the business strong and competitive. The thing is that not all options are open to businesses at various points in their development. Here are some suggestions for funding companies ranging from a startup to an established enterprise.
Options for Startups
A startup is a business that has been around for less than a year. There aren’t a lot of options for obtaining financing since the company does not have an established track record. At this point, it really doesn’t have a credit score either.
At this juncture, the owner may take out private loans and guarantee them based on a personal credit rating. While risky, this is often the fastest ways to secure funding and move the company forward. As long as the payments are made on time, the owner’s personal credit rating will not suffer.
Another possibility is to seek out angel investors. The latter is an excellent option if the new owner has an established reputation in the industry, possibly as a key player in a large corporation. Based on the owner’s history and reputation, investors may be willing to provide the funding with reasonable terms and conditions.
Financing and Young Businesses
A young business that’s been around between one and five years has a better chance of obtaining financing from established lending institutions like lendingclub.com, traditional banks, or business-focused finance companies. Assuming the owner has been diligent in making timely payments on vendor accounts and the business has a small but steady revenue, traditional lenders are more willing to take the risk.
While the options are broader than before, they are still somewhat limited. Depending on the lender, the credit rating and revenue generation of the young business may not be sufficient to meet the institution’s basic business loan qualifications. Even if the company does qualify, less competitive terms and conditions may apply.
Lending Options for Mature Businesses
A mature business is one that’s been around for five to ten years. During that time, the company has established a positive reputation in the community and is known for managing finances well. Traditional lenders are more willing to extend loans to companies that meet all their basic business loan qualifications and possibly even extend business lines of credit. Best of all, the terms offered to mature businesses with steady cash flow are likely to be more competitive.
It’s at this point factoring companies may also be willing to work with the business owner. Factoring is essentially a process involving the pledging of an asset in exchange for receiving funds on the front end. Invoice factoring is one of the more common examples. Essentially, the business owner sells a monthly batch of customer invoices to the factoring partner. The partner advances between 70% and 90% of the batch’s face value. As customers remit payments directly to the partner, additional funds are released. A small percentage of collected revenue is retained as the fee for providing the service.
Financing Options for Established Businesses
An established business has been around for more than a decade. Assuming the company is doing well, has steady cash flow, and there are opportunities to expand, all of the financing options available to younger businesses are on the table.
The enterprise can usually find investors who are happy to advance money in exchange for specified returns. Traditional lenders are ready to offer business loans and lines of credit at the best rates in the current marketplace. Factoring partners are also likely to offer excellent terms in exchange for securing the business of an established enterprise.
When exploring borrowing options for businesses, owners would do well to compare the merits of every avenue open to them. Even if the business is a startup, there is more than one approach to consider. With the right one in place, the company is better positioned to grow and prosper for many years to come.