Here is how you can make your dreams a reality in owning your own business.
Make Your Dreams a Reality: 11 Financing Options to Start a Business
My favorite way to build wealth is by owning a business. Once you own a business that produces cash flow and is fully stabilized, you have the ability to live a lifestyle that you want. You can grow the business to produce more cash flow or find ways to automate and let the business run on its own. Consider these accumulated wealth tips to build wealth.
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Entrepreneurship is both a dream and a career. It takes time, devotion, passion, and hard work. But, it also takes money. It takes initial financing and ongoing support. Once you start your own business in a passion you love, your dreams really do become a reality.
It doesn’t take much to know when you need money. Finding the most prudent financing option is another matter. Borrowing can be confusing and time-consuming.
But, the internet now empowers lenders and borrowers. It can match business needs and lenders willing to help. But, you need to know what works for you before you shop.
What works for one business situation doesn’t work for another, but here are 11 types of business loans and what it takes to get approved. Should you pay dividends out of your business?
Making Your Career Dreams a Reality: List of Financing Options
Here is a list of different financing options to get a business off the ground and make your dreams a reality.
- Think about personal loans. Family loans are not the first choice or recommendation. Startups often rely on the kindness of family and friends, especially when other lenders won’t look at them in their starting phases. Such loans are high risk for borrower and lender. And, they have cost many a family relationship.
But, “personal loans” also refer to money borrowed from institutional lenders without collateral. like those funded by Unsecured Finance Australia. These unsecured loans provide money borrowed and paid back in fixed monthly payments with interest rates higher than normal secured loans but cheaper than credit cards. You can buy equipment, meet payroll, step up your facility, or consolidate other debts.
Personal loan lenders consider your credit score, credit history, and debt-to-income ratio. Good credit will likely lower your interest rate. Allowing for the lender’s processing, the funding may be relatively fast.
- Use business credit cards. Credit cards are revolving lines of credit. You spend against that credit with plans to make minimum monthly payments without exceeding the credit limit. You use them to finance daily expenses, travel, supplies, utilities, and dining.
Credit cards require no collateral, and they earn rewards. Credit cards secured by your business for business purposes may have lower interest rates than consumer cards and promise better rewards. They often come with other business benefits and/or discounts.
They provide a convenient way to chronicle and report business expenses for accounting and tax purposes, and they are an indispensable part of a contemporary business. Your credit card application may be easily approved. But, it will involve a credit check and will add to your debt/asset ratio. In addition, they may come with potentially high and variable interest rates and other fees.
- Go for a microloan. Depending on the business you’re in, you might be eligible for a microloan. These small loans for under $50,000 are made available by non-profits and mission-based providers. While they may be offered to new businesses, they are typically reserved for minority or disenfranchised business owners.
The loans may also come with sustaining business advice and counseling services that coach you through the debt and repayment. Entrepreneur reports, “Microloans are available through nonprofit community-based organizations that serve as intermediaries.”
The Microloan Australia Foundation website lists abound hundreds of such lenders.
But, they will make you jump through some hoops. You must present a formal business plan, proof of your ability to make monthly payments, the willingness to invest your own money, and a plan for the loan’s use.
You can expect to pay higher interest rates and accept the lender’s focus on disadvantaged communities.
- Seek merchant cash advances. Businesses that run a high volume in credit cards can receive funding upfront from the merchant services provider. They then repay the advance with a percentage of their daily credit card sales.
It is a common tool for busy trades businesses running checks, credit cards, and cash through their merchant services to finance current needs. It does not work for business or services working on an invoice basis.
Repayment is convenient because there is no fixed repayment schedule. You repay with fixed withdrawals from your bank or netting a percentage of daily sales transactions.
- Turn to the government. Governments financially support many small businesses and startups each year. Hundreds of grants are available, each with specific eligibility requirements.
Both state and federal governments offer these grants. They require a formal plan for specific goals like expansion, training, research, and development. For example, the Australian Government reminds you these grants are offered without charge.
“The government also offers various free and low-cost business advisory services, financial and tax advice, loans, and other support. A lot of government assistance takes the form of cheap loans, networking, coaching and mentoring.”
- Raise capital via equipment loans. If the business depends on equipment, there is hope for financing. Many small businesses—web developers, consultants, lawyers, and so—on focus on services that do not require big equipment. But, many depend on equipment for growth and expansion like contractors, hairdressers, or auto repair.
The equipment purchased serves as collateral and can be repossessed if you fail to pay off the loan. The terms of the loan parallel with the lifespan of the equipment. And, the approval process and interest rates are determined by your business’s credit strength and the market value of the equipment.
- Factor business invoices. Businesses will have unpaid invoices. For example, a paint store may sell to painting contractors who won’t get paid until their work is done. The paint store extends credit to the contractor so there’s an outstanding invoice.
The business can turn these invoices into cash without waiting through invoice factoring. The business sells its invoice to a factoring company that pursues collection. The business gets cash fast with a little process.
However, the business cost is high, and it risks customer disruption when the business loses control over the collection.
- Finance the invoices. This is a common accounting practice like invoice factoring. But, when you finance your invoices, you put up your invoices to secure a cash advance.
Business use invoice financing to improve cash flow, cover payroll, pay suppliers, and reinvest in operations and growth. Invoice financing lets the business move forward without waiting for the customers to pay.
The lender gets a percentage of the invoice amount as a payment for the service, but the business retains control of and contact with its customers.
- Use a business line of credit. Businesses with established credit may approach their lender of choice to open a business line of credit. You get access to funds up to an established credit limit and pay interest on the money you have used.
A business credit line gives the business more flexibility than a structured loan. The funds are there when you need them, and there is a cap that keeps you from overspending. Especially helpful to seasonal businesses, a business credit line can be approved quickly if the business has a strong relationship with its bank or another lender.
- Apply for a conventional loan. Businesses are eligible for conventional secured loans. To qualify, your business must pledge your plant, equipment, inventory, or vehicles as collateral.
Secured loans have lower interest rates than unsecured personal loans. Lenders may require principals in the business to provide a “personal guarantee.”
That personal guarantee allows the lender access to your personal assets if you fail to pay off the loan. Lenders are likely to waive this requirement if you have a strong credit history.
- Turn to commercial mortgage loans. A commercial mortgage loan is like a conventional home mortgage. The business facility, building, or plant becomes the collateral.
Some lenders specialize in commercial mortgage loans. Such loans have fixed, adjustable, or balloon interest rates like home mortgages, so you are advised to shop for the most favorable terms.
Such loans are likely to be sizable and the terms complex and should be pursued with legal advice. If you transfer money from your checking, here is how routing numbers work. It’s a pretty interesting process.
These are some ways to make your dreams a reality and start a business.
Make Dreams Reality: Go Start a Business
This review of 11 types of business loans and what it takes to get approved hopefully clarifies what’s best for your business needs. The variety of options can confuse business owners, but in a healthy economy, lenders are anxious to build their business on your financial needs.
The most successful businesses have established collaborative relationships with lenders. Both parties have mutual interests in your business success. It just makes good business sense for lenders to support local businesses, even at their startup stage. People in the top 10% of income and net worth typically have 11x the net worth to their income.
The best way to accumulate wealth is through ownership and by owning a business you are building wealth through the growth of the business. These millionaire farmers were grown up with the thought of staying passionate and growing their business. There’s a lot you can learn from that.
At the same time, your business and the lender have stakeholders they must support. So, your loan terms and approval process will change depending on your financing needs. If you want money fast, if you cannot secure the loan, and if you have a struggling credit history, you can expect to pay more. Try to raise your credit score in advance of raising capital from a bank.
If you need large amounts of money for significant growth, you can expect a deeper and longer approval process. However, with an optimized lender relationship, you will expedite the process and manage the terms favorably.
You can do this, too, through online resources that facilitate lending by accepting your application, linking you with favored lenders, and expediting the whole financing process. It’s available, accessible, and used by many business owners like you.
Now go out and make your dreams a reality. Go start a business. What dreams do you want to make come true? Let us know in the comments below. I’d love to hear from you!
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