Different Types of Finance for Small Businesses Struggling With Credit Score

types of finance

Business financing is the blanket term that caters to a variety of questions.

Some of the common questions that arise in the mind are:

  •    Why do businesses require types of finance?
  •    What is the estimated amount that a business requires?
  •    Is the business stable?
  •    Why is there a need for external finance?

While a few businesses might not require any external financing, such businesses often have to make several sacrifices to sustain.

Getting types of finance for your business is the common need of SMEs, as many businesses face hardships while undergoing complicated processes.

It needs to be understood that getting working capital in any economic condition is a daunting task. Irrespective of the need, be it startup-funding, expansion, or money to sustain, the procedure to secure funding is getting tougher each passing day.

Financing is integral to start and promote a business. It does not only help to sustain but also assists in churning profits for the business. If you are looking to finance your business, you have quite a few options to ponder upon. However, the first thing you need to take into consideration is the amount you will require and when do you need it.

The amount and types of finance required by every business are different based on their size and the industry they operate in. It also depends on the type of business – for instance, if you are running a retail business, you will require less capital. In case of a processing business, the working capital requirement is intensive.

Some people call it business funding, others name it business financing. Either way, what’s essential is that you need access to quick capital in order to either run your company or help set it up in the early phases.

Technically speaking, you can pay up the initial costs upfront and cover gaps in the cash flow later with your own money. However, this will do no benefit to you or your business!

Why do businesses require financing?

Yes, different types of finance options do help businesses of all types and sizes to a great extent. However, the question here arises, why do they need it?

There are many reasons why a business owner needs funding for the business. It could be to purchase new equipment, bulking up inventory, fund business expansion, hire resources, or cover day-to-day expenses.

Irrespective of the reason, funding will be required at some point if you want to keep your business in operation. Here are a few reasons why you might need business financing:

For A Startup

Has it ever happened before that you do not have enough resources to get things moving after getting a great business idea? This is where business funding helps you get off the ground. With sufficient funds in hand, you can easily become successful.

If you are not aware, there are more costs involved when you think of starting a business from scratch – and not all of it can be funded from your own pocket. Therefore, you will require financing to cover the mandatory expenses.

Repayments

Are your customers paying you back, but a little bit late? Has this caused inconvenience because your business relies on the invoices of your customers? Not all businesses can bear the effects of delayed payments. This might also result in putting a stop to your daily activities and processes. An extra infusion of cash through appropriate types of finance might help you get back on track and cover the gaps in the cash flow.

Gaps In Cash Flow

Is it that time of the year again? Some businesses are badly affected in their offseason. This is not their fault, but it is crucial for seasonal businesses to get access to additional working capital in such situations. This can be used to buy inventory, prepare bills and payrolls, or take care of maintenance.

Expect The Unexpected

There comes a time when things are actually not in your hand. For instance, a natural disaster ruining your inventory or damaging the infrastructure of your office space. This can only be taken care of if you have access to external financing. As a business owner, you must always expect the unexpected.

With the help of extra cash, you can easily bounce back quicker from the mishap. In addition, it can also be said that extra capital gained from different types of finance is the best insurance for your business in such situations.

These are just a few of the many reasons why you might require additional cash to run and manage your business. External financing is crucial for every business whether they are looking to protect, recover, grow, or expand the business.

Types of finance options for your business

Are you looking for extra capital for your business? There are multiple ways to help you start, manage, or grow your business. Here are a few different types of financing you can get for your business:

Short-term Loans

When you are in a situation to overcome your debts or recover from a loss, the most common option that every business owner thinks of is to go for a short-term loan. This way, you get access to a lump sum of cash in return for daily, weekly, or monthly payments to the lender. The arrangement is simple and convenient to plan your business’s financials.

SBA Loans

Let’s be clear, Small Business Administration or SBA is not a lender to support your finances. It is an arm of the government that helps startups and small businesses to get loans that they would qualify for. The process is that SBA wants lenders to provide funding to such business owners in return for a large portion of those loans.

Business Lines Of Credit

If you have not applied for a business loan before, business lines of credit might seem to be one of the new types of finance options for you. Basically, a line of credit works similar to how you use your credit cards. You have access to funds that you can use to fulfill business needs and requirements. The repayment is for the interest on the amount you take out and use. Once you have repaid the entire amount in full, the pool of funds will be refilled to the originally agreed amount.

Business Credit Cards

Many people consider a credit card to be one of the viable types of finance options for financing a business as it has certain advantages which makes it a suitable option for financing small businesses.

Merchant Cash Advances

In terms of debt business financing, merchant cash advance is an efficient, yet expensive option to overcome problems related to working capital. For such a loan, you do not need a good collateral or credit score to qualify.

So, the question here arises, how does Merchant Cash Advance work?

A merchant cash advance is basically a lump sum loan that you can pay back by giving away a portion of your everyday credit card sales to the lender. This process is continued until the loan is paid completely. Such a loan is considered to be an easy and quick option, where funding can be secured within a day or two. Moreover, it does not require any paperwork. The MCA affects your daily flow of cash. However, the only downside is that you never get a break until the loan is completely paid.

One benefit of such a system is that it is different from term loans. Borrowers are not punished if they have slow weeks. For instance, if you have low sales, then you can pay lesser premiums.

Why is MCA a viable option in contrast to other types of finance options for your business?

Such a loan is a great option for seasonal businesses or those businesses that have a high influx of credit card sales.

A merchant cash advance is a good option if you meet the criterion stated below:

  1.    You do not want a loan, as it will leave a bad impression on your credit report. In case, you plan to make a big purchase or rebuild your credit score, then you may not want a business loan to appear on your credit report. This makes merchant cash advance one of the better types of finance options as it will not show up on your credit report.
  2.    You are a seasonal business owner. Considering the repayment terms, a merchant cash advance is a viable option for seasonal businesses. This is simply because the amount repaid is considerably less if the revenue stream is low. Similarly, the premiums increase during the seasons when profitability is high. This is different from business loans, which require a fixed payment on a monthly basis, regardless of the sales performance.
  3.    For online businesses, a merchant cash advance is one of the great types of finance options. This is simply because they will get a high advance amount as a return for a small portion of their everyday credit card sales. In case you make your earnings via cash or check, then a merchant cash advance may not be the right choice for you.

In a nutshell, there are several reasons why MCAs are a suitable option for businesses. First and foremost, there are no credit checks and no need for collateral. The procedure followed by an MCA to grant a loan is completely different from a bank loan. For a Merchant Cash Advance, your approval depends on the credit and debit card sales making it more convenient for small business and startups to get access to funding quickly.

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