All business owners have one thing in common: they need enough money. Every business owner needs money to start the business and to cover all corporate expenses. This article discusses the most common ways to finance your business. Plus, some important caveats to be cognizant of along the way.
1. Equipment Financing
To run a business, it is important to efficiently and economically acquire, upgrade, and replace equipment used in your daily operations to satisfy customer needs and employee expectations. Purchasing equipment outright can put significant strain on your cash flow. But equipment financing is an economically feasible way to obtain the equipment to keep your business humming.
Equipment finance companies have two primary products: loans and leases.
- Equipment Loans: An equipment loan requires periodic payments that include interest and principal over a fixed term. As security for the loan, the lender may require a lien on the equipment as collateral for your debt. When paid in full, you own the equipment — without a lien. Equipment loans help business owners acquire equipment that would normally be too expensive to buy with cash.
- Equipment Leases: Equipment leasing refers to a person renting equipment from a leasing company for an agreed-upon period. The monthly lease payment amount will depend on the type of equipment, interest rate, credit, and the estimated residual value of the equipment at the end of the lease term. Equipment leasing has flexible end of term options such as purchasing the equipment, extending the lease, or upgrading your equipment. Leases can be especially beneficial for businesses that need equipment for a short time or consistently require upgrading expensive equipment.
2. Business Loans
A business loan is one of the most popular ways people acquire financing. Most businesses will qualify for a loan in some way, shape, or form whether it is regarding working capital, business expansion, or refinancing.
The most common type are installment loan; this is where money is granted to a business in one lump sum. The money is repaid through incremental, fixed payments. By researching what is available on the market, you will be able to find a loan that best suits your needs. Besides acquiring a business loan from a bank, several other financial institutions also offer loans including:
- Credit Unions
- Not-For-Profit Institutions
- Online Lenders
3. Business Credit Card
Business credit cards are a convenient way to track expenses and smooth out cash flow. If all your purchases are on your credit card, you can easily see what you have been spending and where you can cut costs. As the money is not coming out of your account immediately, you can defer payments until a later, more convenient date. Alongside this, most credit card issuers offer rewards and benefits to merchants who have signed on with them. This means you can earn savings in the form of cashback to save your business quite a bit of money down the line.
However, annual percentage rates can be expensive; if you are late with payments you can end up with fees that can be difficult to pay off. Additionally, some credit cards carry extra fees that could eat into the money you save by using the card in the first place. However, if you have good money management skills, take the time to choose the best card available; you can maximize your savings based on how much you plan to utilize the card for your business.
4. Lines of Credit
These are essentially a hybrid of business loans and credit cards. Similar to a loan, a line of credit allows you to borrow a sum of money which is then repaid along with interest in installments. Similar to a credit card, you can request funds at any time up to your available credit limit.
If you occasionally require funds to help grow your business, or simply want a safety net to protect from emergencies, a line of credit can be an incredibly useful way of financing your business.
Crowdfunding allows you to finance your business through peers or supporters. Normally, it is a type of financial support reserved to help get startups off the ground or for inventors who need money to fund a new product.
While it can help to build strong relationships with future clients and consumers, crowdfunding can take a long time to source the amount of money needed. It also might require extensive marketing and networking efforts to get your project funded in the first place.
With many different ways to finance your business, finding the right method for your growing business can be difficult. The options mentioned in this article can be incredibly effective when utilized appropriately. By pairing your business idea with the right financial approach, you will be able to get your business off the ground and generate income quickly.