Last updated on March 15th, 2023 at 04:45 pm
There are a number of effective ways to borrow money for your business, both for short-term cash-flow purposes or for long-term growth. Every business is different and there are lots of different options to suit your needs. Pheabs shares their best options below for when you need to borrow money for your business, including:
Business loans can serve as a straightforward way for your business to borrow money. These are typically provided by lenders, banks or credit unions and come in two forms; secured and unsecured.
Unsecured loans can enable businesses to receive funds very quickly, usually within a 48-hour period. The business needs to choose the amount that they would like to money and agree on fixed installment repayments over a certain time period.
This type of business loan does not require the business to provide any collateral. Instead, the lender will look at a range of factors, including the business’ credit rating and overall finances. Because it is unsecured, the interest rates tend to be higher than those with secured business loans. There are usually also caps on the amount that a business is able to borrow with an unsecured business loan.
The other type of business loan available is a secured business loan. These operate similarly to unsecured loans, in that the business can access funds and then repay it back to the lender with interest over an agreed time period.
However, unlike unsecured loans, secured business loans will require a business to use collateral, such as a property. The rates on secured business loans will thus tend to be lower, and businesses will have access to a larger amount of money with longer repayment periods and lower interest rates.
Merchant Cash Advances
Merchant cash advances are an ideal to get access to money quickly if your business is used to taking payments on credit card or debit card. With this type of product, you can receive money upfront ranging from $500 to $1 million (or more) by showing proof of your revenue and income to the proposed lender.
Whilst you receive the money for immediate use, the repayments are collected from future credit card and debit card sales, which are connected via your card processing terminal and operator.
With funding available within 24 or 48 hours, the rates are quite competitive (3% to 7% per month) and it is a sensible way to manage your cash flow. Perfect for hotels, shops, restaurants, places of interest, events and more, there are also options for people with bad credit or merchant cash advances with no bank statements.
In some instances, personal loans can be used to fund businesses and allow them to borrow money. It is important to first check with the lender that no restrictions will be imposed if you choose to use the funds for business use.
If it unclear whether the loan can be used for business purposes, it is always worth consulting with the lender directly to check.
Personal loans may come into action as a viable option if a newer business with limited trading history is struggling to receive a business loan. Unlike business loans, the lender will assess your eligibility for the loan on behalf of yourself as an individual, not the business. This means that they will evaluate personal credit scores.
Personal loans as a way of borrowing money for your business may benefit businesses only needing a small amount of money. This is because the application process is very quick and the funds can usually be accessed within a 48-hour period.
However, it is important to remember that there are usually caps on the amount that you are able to borrow with personal loans. Furthermore, the individual assigned to the personal loan will be liable for the repayments on behalf of the business.
Business Credit Cards
Business credit cards operate similarly to personal credit cards, in that they will allow your business to gain access to capital, improve cash flow during slower periods, and help to build up a credit score for future loans. The central difference is that the credit card will be issued to the business, as opposed to an individual.
Business credit cards can help businesses to borrow money and manage their cash flow over a short period of time, such as paying for a business purchase or staff expenses.
Unlike loans, business credit cards are relatively straightforward to apply for, and work as a great way to keep track of your business expenditures.
It is important to note however that if your business cannot pay off the balance in full every month, then it can prove to be an extremely expensive way to borrow money. This is because the interest rates on business credit cards tend to be high. Furthermore, there are often limits on how much you are able to borrow with business credit cards.
Invoice factoring is a process by which your business will either sell its good or provide a service to its customers, and then invoice the customer with a copy of this send to a factoring company. The factoring company will then pay up to 95% of the invoice’s balance, sometimes within 24 hours, and then take it upon themselves to chase the invoice from the customer, who will then pay into the factoring company. The factoring company will finally pay over the remaining balance, for instance 5%, to your business.
Invoice factoring for small businesses unlocks the value of unpaid invoices, helping to boost your cash flow in the interim as well as prevent unreliable customers from blocking your expansion or business plans.
It is important to note that business factoring companies will charge a business additional fees. Typically, the higher the value of the invoices submitted, the lower the rate your business will pay. This can further help to motivate your business success as the greater the amount of money your business makes, the more business the factoring company will receive. This in turn could mean that they assign your business a personal account manager, or offer your business expert or bespoke advice on top of their provided services.
Borrowing From Family and Friends
A relatively straightforward option is to borrow money for your business from family or friends, who may be able to provide financial assistance o loans. A great benefit of doing so is that unlike banks, lenders or credit unions, a family member or friend may not feel obliged to charge interest on the funds that you borrow, meaning that you would only end up repaying exactly what you originally borrowed from them.
It is important to note that if you choose to pursue this option, you should ensure that an agreement or contract is decided between both parties. This includes making it clear that the money borrowed is either a loan or a gift, as well as outlining a clear repayment plan. This will help to avoid any awkwardness or disputes down the line as the agreement can be referred to throughout the borrowing process.
Angel investors are typically silent business partners who will invest in businesses. They look at businesses in terms of how much money they will be able to make from it. For this reason, they will need to see strong business plans and ideally a company that has a trading profit or currently profits at a level of a minimum of 30%. In some instances, particularly if a company is in debt but needs investment to come out of it – therefore they may be willing to invest in a business without these, as they can choose how much they would like to fund and are thus more flexible than other lenders.
A great benefit of angel investments for a business is that the money is not required to be paid back. Further, the angel investors will often act as mentors to the business too, offering business advice. They will typically only take a small portion of shares in a business, such as 10-25%, leaving the business owners firmly in control of general business decisions and operations.
There are limits to this financing option. It is not quick and businesses may experience heavy pressure from the angel investors to make returns by a certain point.
Venture capital (VC) funding is a borrowing option for businesses with unpredictable cash flows and a relatively small brand presence. It is thus typically used by newer business still in their early opportunity stage. This is because VC partners end up with shares in the businesses that they choose to fund, so it is important that they have some form of say in the early stages of your business or decision-making processes.
A great benefit of VC funding for your business is that it will not be expected to repay the funds that it receives. Instead, you will repay the VC partner with assigning them a portion of equity. Furthermore, on top of the money that they lend, VC partners can often provide businesses with valuable sources of expertise and advice.
VC funding is typically only a viable option for newer businesses or startups. If your business is looking to borrow money to fund day-to-day expenses such as employee payrolls or purchase orders, then it is not likely to be the best route.