Home > Business > Understanding the Sources of Finance for Small Businesses

Understanding the Sources of Finance for Small Businesses

700 Views

Businesses require additional funds at some point. They can use the extra money to clear their outstanding bills, to make payrolls, to purchase new equipment, hire more employees, and so on. Unfortunately, many firms lack enough working capital to cater for such expenses. Also, traditional financial institutions impose unfavorable lending procedures and documentation, which usually turn off small businesses. But that does not mean that the small firms cannot acquire loans. Nowadays, there are many alternative Sources of funds that offer favorable lending terms to support small firms. If you own a small business and you are unable to secure a bank loan, check out the different sources of finances that you can rely on. 

Merchant Cash Advance 

A merchant cash advance is a temporary financing option. The loans help small businesses to meet their emergency cash flow problems as they look for more permanent financing solutions. Merchant cash advances are also known as business cash advance loans. Here, the business offers its future sales to the lender in exchange for a lump sum. Similarly to the other loans, the borrowers repay the loans with a certain amount of interest. The loans have a straight forward method of application, and the disbursement usually takes place within a week. Also, the lenders do not offer strict restrictions on how the business should use the money. However, the interest rates are quite high, and the borrower should, therefore, strive to repay the loan within the shortest time possible.

Crowdfunding

Crowdfunding is an old concept of borrowing.  Several like-minded entrepreneurs come together and form a group. They set their rules and also make contributions to the ratios that they decide on. After the contribution, interested parties can borrow finances to start or boost their businesses. Crowdfunding works similarly to a financial institution since the borrower might return the money with a certain amount of interest. Crowdfunding offers many benefits to the borrowers. Firstly, it helps them to get immediate cash without paying upfront fees. Secondly, the borrowers get valuable ideas from the rest of the investors. Further, unlike banks, crowdfunding has flexible terms and less stringent loan application procedures.

Angel Investors

Angel investors are senior investors who support growing businesses financially. They run their own successful businesses, and they, therefore, do not have any other interests in the companies that they support. Many angel investors do not offer large amounts, but the most prominent angel investors can offer up to $1,000,000. In return, the angels supervise the company. At times, they might join the board of directors of the business and actively participate in making decisions for the business. It is quite challenging to meet angel investors since most of them maintain a low profile. You can, however, search them on various websites. You must also have a good business plan and a viable project to win their trust.

Small Business Loans

Every country offers unique types of loans for businesses. For instance, the United States provides SBA loans. The main aim of small business loans is to help young entrepreneurs grow up their businesses and gain a competitive advantage in the industry. As a result, the loans have lower interest rates as compared with the other types of loans. Also, most of the loans do not require a significant amount of collateral since the lenders consider them less risky. They are usually backed up by the government, and they allow the borrowers to take customized loans for their needs. Moreover, small business loans offer effective programs that educate borrowers on how to be successful in their businesses. To qualify, the borrower should have a valid company and should have been in the industry for at least three years.

Small businesses can finance their activities by using a merchant cash advance, crowdfunding, or small business loans. They can also fund their projects with the help of angel investors who, in return, may take the top management position in the business.

TAGS , , ,