Beyond a great idea and excellent team, what else do you need to run a successful business?
Sufficient capital.
Thankfully, there are a lot of funding options out there for all sorts of businesses today, from startups to established companies. Listed here are the six most popular types of funding:
1. Traditional term loans
With a traditional term loan, a bank or other lender provides you a lump sum of cash. This money is repaid, along with interest, over a fixed period of time. Term loans suit a wide range of business purposes, often being used as a way to fund long-term business expansion and goals.
Here’s what a term loan could be for your company:
Requirements for term loans are generally more strict than alternative forms of funding. Generally, you need at least one year in business, a credit score of 600 or higher, and at least $90,000 in annual revenue.
2. Bootstrapping
From Craigslist to GitHub, plenty of great companies have bootstrapped their way to success. Even with all the funding options available today, bootstrapping remains one of the most popular ways for entrepreneurs to fund their venture. It’s how you can run the business on your terms, as well as avoid high financing costs or giving up too much equity.
Beyond personal savings, you can take out a personal loan for business, which can typically give your business up to $35,000 at interest rates comparable or even lower than a term loan. Your rates and terms depend largely on your personal credit.
Additionally, you could consider working a side job to bring cash flow to your startup. Some ideas include being an Uber or Lyft driver, running an e-commerce store, and tutoring in a subject you know well.
3. Business line of credit
A business line of credit works much like a credit card, but you can access actual cash. In some cases, the APR may be lower (usually it’s between 7-25%). Credit limits can be from $10,000 to over $1 million.
Business lines of credit are great to ensure cash flow to meet short-term needs, like payroll, inventory, and other day-to-day necessities. You can literally use the money for any business purpose. As revolving capital, a business line of credit replenishes as you repay the money you withdraw. The other main advantage of a business line of credit is that you only pay interest on the funds you withdraw.
In short, a business line of credit is one of the most popular types of business funding because of the control, flexibility, affordability, and convenience it offers. Businesses that get favorable rates and terms have been in business for more than six months and have more than $50,000 in annual revenue.
4. Equipment financing
To put it simply, equipment financing is money from a lender for the purchase of equipment, from cash registers and construction machinery to computers. The equipment itself secures the loan, meaning lenders are less concerned about your credit score. On top of that, financing costs for equipment loans are usually tax deductible.
A typical equipment loan may look like this:
To get the best rates and terms on equipment financing, ideally, you have 11+ months in business, six figures in annual revenue, and a credit score exceeding 600.
5. Friends and family
As many entrepreneurs note, this is perhaps your best chance to secure money to get the business off the ground. If your friends and relatives don’t want to give you money, who will?”
Of course, this can be tricky and sensitive. After all, you don’t want to put stress on an important relationship.
So, show you’ve done your due diligence by presenting a business plan and roadmap. Choose who finances you carefully, as you want someone with solid business expertise. Also, clearly define whether the money is a loan or share in the business. Establish a repayment structure if it’s a loan or way to disperse dividends if it’s an investment.
6. Angel Investors or Venture Capital
If you’re in the early stages, angel investors, who are accredited investors with more than $1 million net worth or annual income exceeding $200,000, are a better option. Angel investors look to finance working ideas that need more cash to get going.
Venture capitalists look for companies a bit later in the growth stage, those that are cash flow positive but need a capital injection to scale and reach their full potential. Venture capitalists are often more hands-on, as they represent a firm and have their own investors and board of directors to satisfy.
Angel investors and venture capitalists are popular options for investment simply because they can offer lots of capital if they like your business. When you present to such investors, follow Sequoia Capital’s advice: Present the pain point quickly, show your solution in an exciting way, and highlight the market and show how your team beats the competition.
Finding the business funding you need
These are six of the most popular types of business funding. By exploring these options, you should be able to land the capital you require. Of course, there exist other options.
For instance, invoice financing can help bridge cash flow when you have unpaid invoices sitting there. A merchant cash advance is suitable if you need cash now and can pay it back with future credit card transactions.
In the end, the point is this: Take time to check all your funding options. With careful calculation and proper research, you can get the best financing product possible for your business.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.
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You mentioned merchant cash advances in one of your closing paragraphs. That type of short-term business loan can be used by retailers who have an opportunity to buy discounted inventory if they pay in cash because a merchant cash advance can be approved in 48 hours if the business qualifies for that type of loan. Usually the qualifying requirements are nothing more than a minimum level of credit and debit card sales (most often around $10,000 a month) and having been in business for at least a year, so the application process is very fast and can be done online. Most of the other types of loans mentioned in the article take much longer to negotiate and can be much harder for small businesses to secure.