When faced with a need for additional working capital, businesses have a variety of business financing options to review. It’s important to consider the impact each option will have on your company and understand the differences between each option, so you can make the best decision for your business and situation.
Here are three common business financing options:
Traditional Business Loans
Asset-rich businesses with an established history of credit management will likely be able to obtain a traditional business bank loan. The loan may require collateral and an agreement to pay it back (plus interest) over an agreed upon term.
The term is frequently shorter for conventional business loans with a note due at maturity (balloon payment loan).
Small Business Administration (SBA) Loans
The Small Business Association (SBA) offers a variety of programs for small businesses. The SBA is not a lender, they do not lend money directly to business owners (except for some micro loans). They set guidelines for loans made by their partners. SBA loans are partially guaranteed by the government, thus eliminating some risk for lenders and making them more willing to offer larger loans to small businesses.
Accounts Receivable Financing
Also known as “invoice factoring”, is when a company sells their receivables at a discount to a factoring company (“the factor”), who will then assume risk for the invoices. Usually businesses receive 70 – 90% of the total value depending on the age of each receivable. When engaging in a factoring loan, the company sells their right to full payment in exchange for immediate cash.