6 Options for Borrowing Money for Small Businesses

Funding is a common obstacle for small business owners, but it should not stand in the way of business execution or discourage entrepreneurs.

Finding the right type of funding for a business is one of the most decisive factors when it comes to turning business dreams into realities. However, since the onset of the recession, lenders especially banks, have become increasingly reluctant to finance small business projects. If you are in this situation and need to find alternative sources of funding, read on to learn about six options that can help you realise your business goals.

Bank Loans

Taking on a business loan from a bank offers several advantages. First, banks specialise in lending to small business and often have a range of financial products that suit different types of businesses. Many financial institutions also give business owners the flexibility to choose their repayment terms and fix the interest rates. Moreover, business loans are usually approved within 48 hours. On the other hand, it is often necessary to have a good credit history in order to secure a business loan, and the penalties for late repayments and defaults can be stiff.
Social and Community Lenders

Unlike commercial financial institutions, social lenders do not offer their services primarily for economic reasons, so it is very likely that their interest rates, fees, and repayment schemes are better suited to small business owners. In the United Kingdom, social lending is also known as peer-to-peer or person-to-person lending. A large number of these schemes operate online and, over the years, a system of risk controls and credit checks has been implemented to make social lending sites safer for both lenders and borrowers.

Business Overdrafts

Overdrafts can be arranged if you have a business bank account. They can be a flexible and cost-effective way of borrowing money in the short term or when you are faced with cashflow shortfalls (for example, in cases where you are awaiting payment from sales but need to purchase materials or pay your suppliers). However, using an overdraft persistently can lead to the bank cancelling this facility, as they may think that a business that needs to resort regularly to overdrafts is not financially sound.

Business Pay Loans

As it is the case with personal loans, these financial solutions should be approached with caution. Personal pay loans are known for having high APR rates and for charging high fees whenever repayments are not met. However, if you require cash for your business rather quickly and are certain that you will be able to repay the amount borrowed within the specified deadline, a business pay loan is an option.

Invoice Finance

This method involves selling outstanding invoices to a bank or an independent provider, who will collect the unpaid amount from your clients on your behalf. As a small business owner, you can sell up to 85 per cent of the total amount of an invoice, which means that invoice finance could offer quick cash injections when your cashflow situation is not all that buoyant.

Merchant Cash Advance
A merchant cash advance is an alternative to a business loan that could help grow your small/medium sized business. It is quick to apply for and provides a lump-sum advance based on your monthly card transactions. The advance is automatically paid back through a fixed, specified percentage of daily card processing settlements and because there is no fixed payment amount, during quiet trading periods the repayments are lower, further helping cash flow, while the reverse is true for higher-volume trading periods.
Regardless of which form of financing you choose, remember that having a detailed business plan and being able to demonstrate your credentials to lenders will help secure funding. Make sure you evaluate the pros and cons of every option available to ensure you make the right choice for your business and circumstance.

Anthony is a keen blogger and regularly writes about business and entrepreneurial advice.