Starting and running a business takes ambition, energy, vision and ideas. But it also takes money. Financing may be required to get a start-up on its feet, to meet payroll or satisfy tax obligations. Other businesses may need money to hire new employees, expand into a new market or launch a new product. When traditional business loans are out of reach because a company doesn’t have sufficient credit, collateral or operating history, those financial needs don’t go away, and entrepreneurs have to get clever.
- Small Business Administration Loans: The Government Middleman
The Small Business Administration can help businesses secure capital through debt financing, surety bonds and equity financing. The SBA does not loan money directly, but through its guaranteed loan (debt financing) program, it sets strict regulations for its partner companies, and helps businesses secure financing through those companies.
The SBA also utilizes a public-private partnership called the Small Business Investment Company. Just as with the SBA’s debt financing arm, SBIC does not invest directly in businesses, but instead leverages its private-sector relationships to help businesses secure venture capital.
- ACH Loans: Borrow Against Future Profits
With ACH loans, lenders finance a business’s future sales. After evaluating a business’s financial statements, profits, deposit history and potential for future growth, an ACH lender will loan a certain amount of capital, depending on what its investigation concludes the business is capable of giving back.
The lender then secures repayment by making scheduled withdrawals directly from the business’s bank account, which is also called an automatic clearing house — or ACH. These kinds of loans are fairly easy to get, but they can be expensive money.
- Invoice Factoring: Secure Financing Against Outstanding Invoices
Many businesses get in a financial pinch when customers are slow to pay. Invoice factoring is a type of financing that enables businesses to borrow money against the value of their outstanding invoices. These types of lenders examine the creditworthiness of the customers that owe outstanding invoices to the business seeking the loan. When the invoices are paid to the business, the lender will be repaid from those incoming settled accounts.
- Debt Financing: Borrow Against Security
According to Entrepreneur, debt financing includes both secured and unsecured loans, but most lenders require security behind a promise to repay — even for financially sound companies. Businesses can secure these kinds of loans by offering lenders securities, real estate, equipment, warehouse inventory or display merchandise, which the business would forfeit to the lender if they defaulted on the loan.
If the business does not have this kind of collateral, or the lender doesn’t find it sufficient, they can offer assurances from third parties, called guarantors, endorsers or co-makers. All three play similar roles, but who assume different repayment obligations. Endorsers, for example, would have to post collateral of their own on the business’s behalf, while a co-maker would be directly responsible for payment if the business defaults. Debt financing is not to be confused with personal debt settlement or business debt settlement.
- Venture Capital Financing: Big Money — Plus Advice and Expertise
Venture capital firms often operate exclusively in a specific industry or market segment. Therefore, they offer not only money, but managerial knowledge and expertise of a borrower’s specific field of business. Venture capitalists are investors, not lenders, and when they spot a promising business with potential for future growth that is being hampered by a lack of capital, they will pool their money — in many cases, large investments of up to tens of millions of dollars — to trigger rapid growth.
With their money, however, comes a degree of control. Venture capitalists take a hands-on approach, offering advice and managerial oversight. They pump in money to trigger large returns in a short period of time. A venture capital investment almost never has a horizon of more than three to five years.
Whether you’re a business that needs a huge influx of cash from venture capitalists seeking short term returns, or a small business that fast business loans because customers are slow to pay invoices, there are ways to secure financing if you’re a good company with solid financials. Some money is more expensive than a traditional loan, but it is the price of doing business.