Getting funding for a new business can be difficult. Without a track record of sales and on-time payments, banks might be hesitant to approve you for loans or lines of credit. Sometimes, new businesses even have to pay costly fees just to get that first credit card. Luckily, there are many options when it comes to financing or funding your business funding, and depending on what kind of business you are (B2C or B2B) and what you are selling, one or another might be the best fit for you.
We’ve outlined some of the best ways to finance your business, including considerations specifically for B2B businesses, and what you should think about regarding financing for growth.
What are some common sources of business funding?
Here are some of the most common sources of startup business funding and traditional business funding, along with best use cases for each.
Banks are a good place to look for business funding when you want to get an understanding of what you can qualify for. A bank can help you understand where you are in the scope of being qualified for certain types of loans, and help you get on track for where you want to be by providing the documents and collateral you need. Especially for small business, local banks can be helpful due to their specific interest in business in the community.
Best for: Established businesses that have strong credit and collateral, or new businesses looking to understand their options.
2) SBA loans
The SBA or small business association offers traditional banks or other lenders a federal guarantee on your loan, so banks can feel more assured when providing you the finances you need. Most traditional banks will not give you a loan to start a business, though the SBA might provide this opportunity.
Best for: Small businesses who might not meet the strict qualifying criteria for bank loans.
3) Credit unions
Credit unions offer favorable rates and SBA backed loans but have a track record of lending more to small businesses. You generally have to be a member of a credit union to benefit, and these are more community focused and foster personal relationships.
Best for: Credit union members who want a sense of community or personal relationship when it comes to their business financing.
4) Small business grants
Grants award businesses with the capital they need to grow based on merit, and without the added stipulation of having to pay the loans back. They are generally offered through non profit agencies, corporations or government organizations. Grants might have specific focuses like vertical, minority grants, etc.
Best for: Businesses deserving of free financing - potentially doing something very unique, or with founders from unique backgrounds.
5) Online lenders
Online lenders have had an increase in popularity as B2B and B2B e-commerce have continued to grow. Online lenders can be helpful for businesses who don’t have a strong credit history yet (like a new business) or need fast capital to fulfill an order or to fund business operations (such as purchase order financing or invoice financing). If you qualify, many online lenders can turn capital around in 24 hours.
Best for: Businesses who might have lower credit or want fast funding and ease of applying.
6) Small business credit card/business lines of credit
If you have solid personal credit as the founder of your business, you might be able to qualify for a business credit card like Brex. This is one of the most efficient ways to fund startup costs because these cards come at low rates as well as with promotions like interest free periods or sign up bonuses. By using corporate cards, a business owner can help build their business credit history. You want to avoid using personal credit cards or personal loans for business, as mixing personal and business purchases can create many accounting issues.
Best for: Entrepreneurs with solid personal credit.
Crowdfunding sites rely on investors (of all levels) to help get a business up and running with capital. Generally all crowdfunding efforts require some sort of exchange, such as investors preemptively purchasing a product with other perks and equity. In order to succeed with crowdfunding, your business idea must attract potential investors, as well as have other contextual marketing efforts to bring investors to your crowdfunding site.
Best for: Startups with interesting products and a knack for marketing.
8) Equipment financing
If you need funding to purchase equipment for your new business, equipment financing is a great way to do it. The equipment you purchase will act as collateral for the funding you use to purchase it, so the loans are generally easier to qualify for as a business. Many of these loans have a minimum requirement for time in business but many will not.
Best for: Businesses that need equipment - such as B2B distributors and suppliers working in warehouse environments.
9) Invoice financing
Invoice financing or invoice factoring allows a business to access in advance a portion of the outstanding invoice value. Getting this type of funding generally relies on your business having accounts receivable and having invoiced at least one customer, but requirements vary for different lenders. It can help with accounts receivable management.
Best for: Businesses with little time in business who need to improve cash flow, or established businesses with busy periods or in need of financing big orders.
How is financing for B2B different than B2C?
Depending on the type of business you are, different funding options will work better for you. For example, B2B ecommerce businesses might benefit from corporate cards or invoice financing options that allow for quick application processes and turnaround times, allowing them to finance and process large orders quickly.
What to think about before applying for a business loan
Here are some things to consider before applying for a business loan:
1) Consider this question: “Do I have good credit, or is there any way to improve my business credit?” Regardless of what financing option you go with, you always need to think about credit for long term financing options.
2) Think about bartering or trading equity services. This would be something like offering a version of your software to a company that in turn helps you with accounting, so you don’t have to pay for that with working capital. This makes sense for entrepreneurs and businesses just getting started.
3) Think about strategic partners or customers that would be willing to negotiate an advance. (This can really be helpful for improving customer relationships and helps you avoid the small business loan-startup conundrum).
4) Solicit VC investors or more long term strategic investors.
What is required to be eligible for a business loan?
- Open a business bank account (to demonstrate an existing business).
- Check credit scores and have a breakdown of your credit history.
- Incorporate your company (tied to real estate address).
- Obtain required state/federal licenses for your business.
- Get your EIN (employer identification number).
- Determine what you need to start or grow your business (loan amount/total amount).
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