7 Different Funding Options for Startups
No matter how profitable your business idea is, your company will have little chance of surviving the first few years without sufficient capital. While a few startups may go for months relying on their investments, they’ll eventually find themselves looking at different funding options to sustain their startup.
While banks may be the best avenue for obtaining business funding, their loan products are only for the most creditworthy customers. Startups, in this case, could have a hard time qualifying for financing from them, considering their lack of credit and financial history.
That is not to say that there are no financing options for young businesses. Below are seven different alternative funding options you can consider for your new business:
1. Inventory Loans
Inventory loans are a form of business financing where companies use their inventory as collateral to secure the loan.
Typically, the company’s amount of funding will depend on the type of inventory used, inventory churn, and the business’ industry. In general, once a business gets approved for an inventory loan, it can expect to receive up to $1,000,000 in funding. However, startups may qualify for a lower funding amount, considering their credit history.
It is worth noting that inventory loans can only be used to purchase inventory (as this will serve as the collateral for the loan). In other words, you cannot use the proceeds to buy equipment, cover cash flow gaps, or invest in commercial real estate. If that’s your purpose for seeking financing, it might be better to consider other forms of business funding.
2. SBA Microloans
SBA Microloans are federal-backed small business loans offered by the Small Business Administration. In this case, the SBA will provide the funds to participating lenders, which will be the ones that will underwrite the loan to small business owners.
Unlike other SBA loans, SBA Microloans are specifically designed to cater to startup businesses and companies owned by minorities, women, and veterans. Once approved, the business can get up to $50,000 in funding, which they can use to cover their startup costs. For example, it could include paying rent and utilities and buying supplies, fixtures, equipment, and other business essentials.
3. Invoice Financing
If your startup offers net term payments to your customers, chances are, you may experience cash flow gaps from time to time. As a result, it can make it harder for you to meet your monthly payables or even invest in business opportunities.
You can apply for invoice financing to free up the capital tied up in your invoices to avoid that. Unlike invoice factoring, where you’ll need to give up control over your unpaid customer invoices, invoice financing lets you retain control over your accounts receivable ledger. But, of course, you’ll also be responsible for the payment chasing and collection.
It’s common to find financing companies that work with startups because, unlike other types of businesses financing, the business’ credit score is not the primary consideration here. Instead, the invoice financing company will look at your customer’s creditworthiness to determine the accounts receivables eligibility.
4. Invoice Factoring
Invoice factoring is a variation of invoice financing. You will have to sell your customer’s outstanding invoices to factoring companies (or factor) with factoring. The factors will have complete control over the ledger and will therefore be in charge of the payment chasing and collection.
Some businesses may be uncomfortable with having the factors collect the payments from their customers. Because, then, their clients will know that the company is using a factoring company. However, this can be beneficial for some businesses, especially if the company doesn’t have enough resources to handle the payment collection.
Like invoice financing, your customer’s creditworthiness will play a significant role in your approval. So, make sure that you’re working with reputable and creditworthy customers to increase your odds of getting approved for invoice factoring.
5. Business Credit Cards
Business credit cards work just like personal credit cards. The difference is that the former should only be utilised for business-related purchases. With a business credit card, businesses can cover business expenses like buying supplies, paying for plane tickets for out-state seminars, buying employee lunch, purchasing equipment, and more, as long as they don’t exceed the set credit limit.
Business credit cards are usually one of the first funding options startups apply for because credit card providers only look at your credit score to determine your eligibility for the funding. So even if you’re a startup with an unestablished credit history, you can still get approved for a credit card.
Essentially, the better your credit score is, the higher your chances are of qualifying for excellent credit card terms. Unfortunately, it’s also not uncommon to find credit card providers who would be willing to work with business owners with less than stellar credit scores.
Another advantage of business credit cards is that it allows you to earn points and rewards every time you use your card. Once you’ve accumulated enough points, you can then convert them into discounts or travel miles, resulting in significant savings for your company.
6. Business Lines of Credit
Business lines of credit work a lot like business credit cards where the borrowers can use the funds as long as they don’t exceed the set credit limit. It also provides spending flexibility so that companies can use it towards a variety of business initiatives, including:
- Inventory reordering
- Renovations
- Product expansion
- Covering day-to-day expenses
- Bridging temporary cash flow gaps
- Creating a safety net in case of emergencies or unforeseen expenses
Once approved, the lender will open a credit line that you can access on an as-needed basis. As you withdraw funds, the credit available to you goes down and goes back up as you make repayments. You’ll only have to pay for the amount you used, plus interest.
As a startup business, you can’t expect to receive large funding upon your initial application. You may also be required to put up collateral to secure the loan – being that you’re a high-risk borrower. Additionally, you will have to sign a personal guarantee agreement, which renders you personally responsible for the repayment of the loan in case the business becomes unable to.
7. Venture Capitalists
Aside from debt-based financing options, you can also opt to go with equity-based financing options. Equity-based financing is simply a funding option where the business owners obtain funding by selling some company equity. One of the most popular sources of equity-based financing is venture capitalists.
Venture capitalists are a company dedicated to funding high-potential startups. In exchange, they get equity from the company and may require a seat on your Board of Directors. With that, they can then participate in its management and decision-making processes.
Venture capitalists can provide higher funding amounts than a typical business loan, especially if they see much potential in your company. Plus, you won’t have to pay the financed amount back. But you will have to set aside a portion of your sales to give to your investor(s).
Start and Grow Your Business With Small Business Financing Now!
Managing a business comes with a lot of responsibility. One of them is finding the right funding option to keep your company afloat. Fortunately, with the emergence of alternative financing options, SME’s now have more choices than ever.
If you’re looking for the best startup funding for your young business, the options mentioned above would be worth considering. However, don’t forget to do your due diligence before moving forward with your application. The last thing you want is to end up with a loan that doesn’t let you address your needs or one that’s too expensive based on your current financial situation.
