15 Ways to Get Money for Your Business

There are several different types of loans for business financing available. Below, I have outlined the most typical business loans that are available to small businesses. As always, you need to make sure that you have a well thought out financing strategy both short- and long-term. One of the main reasons that business fails is cash flow.

SBA Loans: These are backed by the Small Business Administration and can be used to start or buy a business. There is no minimum loan amount, and businesses can borrow up to $5 million. Interest rates are generally in the five-to-nine-percent range in 2016. Terms range from less than one year to 20 years.

Accounts Receivable Factoring: This isn’t strictly a loan. Instead of borrowing against accounts receivable, businesses sell them at a discount to factors (companies that purchase receivables at a discount and then collect them). The discount typically translates to a 10-to-15 percent interest charge.

Merchant Cash Advance: Similar to accounts receivable factoring, the cash advance isn’t really a loan; it is the sale of future receipts at discount to a buyer. Usually the sellers are businesses that can’t get traditional lines of credit. They generally operate with a lot of credit card receipts but not a lot of cash flow. Interest rates range from 18 – 22 percent.

Start-up Loans: Startup loans cover the costs of creating a business. These can be SBA loans, private loans, large commercial packages and alternative loans like crowd funding or microloans. Startup loans from traditional sources like banks require detailed business plans and often collateral and/or a personal guarantee. This can be risky — a restaurant owner who gets a startup loan could lose the restaurant if he or she defaults, and perhaps personal assets as well.

Franchise Loans: Franchise loans are like startup loans for franchisees. They require significant participation; 10 to 30 percent of the startup costs must be injected by the owner, with 70 to 90 percent coming from the lender. The SBA also backs franchise loans. That guarantee is called a 7(a) loan.

Business Acquisition Loans: These loans finance the purchase of an existing business. They are considered safer by lenders because the enterprise’s income producing ability has been established. Buyers can acquire their businesses with seller financing, or with a bank loan (easiest for an established business), or they may just borrow against the assets of the business, using them as collateral — for example, a mortgage on an office building.

Lines of Credit: This is short-term revolving (reusable) financing designed to smooth out cash flow — for instance to fund the purchase of inventory and be repaid when that inventory is sold. Lines of credit can be unsecured or secured by anything from business assets to the personal property of the owner.

Professional Loans: These are designed to meet the needs of traditional professionals — doctors, law offices, accounting firms, etc. It’s short-term credit, payable in two-to-six months, with interest rates of five to 10 percent.

Equipment Financing: These loans are used to finance major equipment and large vehicle purchases and they are secured by the equipment itself. Interest rates range from eight to 25 percent.

Equipment Cash-out Refinancing: Business owners refinance their heavy equipment and vehicles to get larger sums of cash, using their equipment as collateral. Typically, they can get about 40 percent of the value of the equipment in cash. They then repay the loan in installments over time. This scheme is also known as a “sale-leaseback,” and is set up so that the business sells its equipment to the lender (getting a lump sum) and then leases back the equipment from the lender (making monthly payments).

Construction Financing: This is for the construction of commercial buildings. Lenders evaluate the loan application based on the projected costs, value and potential income of the building — information compiled on a real estate pro forma. Once the building is complete, the construction loan is paid off with a permanent loan, a real estate loan with a repayment period of 10 to 25 years.

Hard Money Equity Loan: Hard money, as the name implies, is high-interest, short-term financing for those who either can’t qualify for better deals or those who need financing too quickly to go through more orthodox channels. They are not based on the borrower’s credit rating, just the value of the asset the lender can repossess if not repaid. These secured loans carry interest rates ranging from 10 to 30 percent.

Working Capital Loans: Working capital is defined as the difference between a business’s current assets (cash, investments and other liquid resources) and current liabilities (obligations that are due within one year). It’s available to fund the daily activities of the enterprise. Working capital fluctuates as expenses and income rise and fall independently, so working capital loans help business maintain enough cash to meet their operating needs. These loans are short-term and can be secured or unsecured. Rates range between three and seven percent.

Accounts Receivable Financing: Also called purchase order financing, these loans have very short terms (one to two months). Borrowers receive cash advances of payments due from their customers, typically within 30, 60 or 90 days, providing needed capital to meet operational overhead.

Peer to Peer Loans: This alternative financing category allows business to apply for loans in amounts ranging from $1,000 to $35,000 at rates between six and 36 percent. Most have fairly short terms, from one to three years. The loans are facilitated through P2P sites and obtained from individuals rather than institutions. They may be secured or unsecured.

Small business financing exists to meet many needs and takes many forms. The process of applying for a business loan and receiving the money can take anywhere from a few days (for hard money) to months (up to nine months for a complicated startup or acquisition). Understanding what you need and why, what you will be asked for, and what you will have to commit to is key to both preparing for and securing the financing you need.