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DO IT YOURSELF

You take pride in doing things yourself? Or you are quite there financially speaking to hire outside help? This section will provide you with the tools to get going.

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THE PROS AND CONS OF DIFFERENT SMALL BUSINESS FINANCING OPTIONS

Being a small business owner is both highly rewarding and fraught with pitfalls, most of which come back to funding. Starting a business can be expensive, and keeping it going in an everchanging economy requires not just hard work, but also financial responsibility and creativity.

Many small businesses struggle to get the financing they need; different business types require different levels of funding. Location and other factors also play a role, which can make it tough to get the money you need to start or sustain your own business. However, it's not impossible. There are a variety of ways you can get small business financing-if you know where to look for them.

Small Business Loans

When people think about business financing, they often think of a small business loan. Offered by a bank, credit union, or other lender, a small business loan may be used for everything from startup, to operating capital, or even expansion. Some business owners will use this type of loan to purchase new manufacturing equipment or other tools to help their business run better. Others might use it for seasonal inventory or other business needs.

To be eligible for a small business loan, you don't necessarily need a fantastic personal credit history since there are only a few lenders who work specifically with subprime credit. In most cases, however, lenders have a minimum credit score they're willing to work with-usually between 600-650.

Even then, the lower your credit score, the higher you can expect your interest rate to be. For some borrowers, that could mean paying 35% or more in interest. One lender that allows applicants with credit scores of 500 charges up to 99% APR for a loan. If you do have a good credit score or business track record, however, you may receive rates as low as 4.99%.

Another option is to use invoice-based financing in which you're granted a loan based upon your accounts receivable. This will allow you to receive the funding you need without spending the next several years paying extreme interest rates. Instead, you can simply pay the loan off as you get paid.

Small Business Grants

If the idea of balancing debt with your business isn't very appealing, you can search for a small business grant. Offered by various philanthropic organizations and the federal government, grants are free money.

Unlike a loan, you don't have to pay it back. In most cases, however, you will have to compete with other businesses for the grant award. If you were to receive this award, there is a chance you will have to report back to the granting authority about how the money helped you and show that you used it for its intended purpose. Grants can be offered for specific business types, locations, or even owners. Federal grants exist, for example, to help businesses run by minority owners, military veterans, or women. On the other hand, private grants may look to assist businesses that want to open in a certain town or neighborhood as a new business coming to a community can be an investment in that community's economic future.

Each grant program will have its own eligibility criteria and application process. You can expect to be asked for a business plan, balance sheet, profit and loss statement, along with other documents. While your credit doesn't come into play during the grant process, your ability to communicate what you need the money for-and your plan for using it effectively-will be considered by the granting authority. Make sure that you have your work in order.

Business Line of Credit

For some businesses, a loan isn't what they need-instead, they need more of a revolving line of credit that they can use, pay off, and then use again as needed. They may have flexible funding needs, or a seasonal fluctuation in their sales and inventory. For those business owners, a line of credit may work better.

A business line of credit has a draw period during which you can withdraw funds that lasts for a few years. During that time, you're welcome to take out any amount up to the limit of your line of credit, make payments on the balance, or simply leave it alone if it's not needed. After the draw period ends, you'll move into the repayment period. During this time, no more withdrawals are allowed, and you must start paying off any balance that has accumulated.

Equity Financing

Equity financing is when you sell shares in the company before it's profitable. Investors get a diluted ownership, but you get funding up front. This is generally used in the startup phase before the company starts making any profits.

This type of funding can infuse a business with much-needed operating cash right at the beginning, allowing your company to get to a profitable point much faster. However, it can also mean giving up 40% or more of the ownership of your business, which can pose a problem for some owners.

Conclusion

To know which type of financing your business needs, first look at what you need the money for. Are you expanding? Just getting started? Do you need inventory just before the holidays? As you understand your business' situation and needs, you'll better understand which financing solution is best for you and your venture. Once these things are understood, your small business will find not only the proper financing needed, but also success.

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Andy Kearns is a Content Analyst for LendEDU and works to produce personal finance content to help educate consumers across the globe. When he's not writing, you can find Andy cheering on the new and improved Lakers, or somewhere on a beach.

Photo : Pixabay