Updated: Dec 1, 2021
By Eric Goldschein
Affordable financing is one of the most important tools in an entrepreneur’s bag. Having money to finance startup costs, cover payroll gaps, afford impactful marketing campaigns, and otherwise invest in your business is crucial, especially in the early going. Cash flow mismanagement is one of the most common reasons why small businesses fail.
When it comes to financing, new business owners have fewer options than those who run big, long-established businesses. Lenders are more likely to extend low-interest loans to businesses with a history of profitability and responsible spending. If you don’t have time to build that history, there is no substitute.
So if you have business financing needs for your startup, what are your options? You can delve into your savings, ask relatives for investments—or explore these six financing options for new businesses.
The Small Business Administration has a program where it partially guarantees bank loans to small businesses. This gives small businesses a chance for a loan with a single-digit interest rate and generous repayment terms.
Most SBA loans are only for well-established businesses, except for the SBA Microloan. Intermediary nonprofit lenders disperse the SBA Microloan funds, lending up to $50,000 to startups and small businesses. Many of these startups are run by women, veterans, minorities, and other overlooked entrepreneurs.
If you have a large equipment need for your small business, such as vehicles or heavy machinery, and equipment financing loan is an excellent option.
In this scenario, the lender—it could be a bank, an online lender, or the seller of the equipment itself—extends the exact amount of money needed to purchase the equipment to the borrower. The borrower pays back that amount, plus interest, over a set repayment period.
Equipment financing is relatively affordable and low risk because the loan is “self-secured” by the equipment itself. That means the equipment acts as collateral, so if you miss your payments and default, the lender may seize the equipment to recoup their losses—no further financial penalty necessary.
Invoice Financing or Factoring
If your business operates on an invoicing system and you find that clients take forever to pay what they owe you, you have a few options. One is to finance (or factor) your invoices for immediate funds.
In invoice financing, a lender extends you the vast majority of what you’re owed by a client and charges you a fee based on how long it takes for you to be repaid. In invoice factoring, you essentially sell your invoice to the lender, who then becomes responsible for collecting your client’s debt. You’ll get less of what you’re owed this way, but you’ll regain the time and resources you would have spent on collections.
Business Credit Cards
A business credit card is an excellent and flexible tool for new business owners. Not only does it help you rack up reward points and give you benefits like purchase protection, but you give yourself a short-term loan to repay each purchase.
Eventually, you may qualify for a credit card with a 0% APR introductory rate—which means you’ll pay no interest over the life of the offer. There is no other business loan that will give you such a low rate.