Small businesses need sources of finance to get adequate funding for their venture. While majority of small businesses start with the entrepreneur’s own funds, access to additional sources becomes important to meet the spiraling costs. Various options are available to add to the pool of funds needed to meet the expenses of the small business.
However, all of them come at a price, in the form of interest rates. The key to success lies in keeping costs low, and therefore it is imperative that the most reasonable source of funds is used to finance the small business. Some of the small business finance options are listed below.
- Using a personal credit card – During the initial phase of the business, many entrepreneurs choose to use their personal credit cards to pay for their business expenses. They are able to do so till the credit limit set by the bank. They can be used even at a time when the cash flow conditions of the company are not positive.
- Business Credit Cards – Applying for a business credit card makes more sense than using a personal one. Business credit cards come with higher credit limits, special offers, rebates and discounts and flexible payment plans. They can be used to pay for materials, equipment and all types of supplies. There are numerous business credit cards to choose from. It makes sense to select the one that comes with the least interest and maximum benefits.
- Lines of Credit – This is another option open to small businesses and can be used during a lean season. The advantage of this is that it is a flexible system whereby the borrower can use credit only if he requires it, and pay interest only on the sum he has taken. Paying back the sum taken increases the credit limit again. A line of credit means credit is available as and when required and the entrepreneur does not have to rush to get a new loan sanctioned every time the need for funds arises.
- Bank Loans – banks offer various types of loans to small businesses. Entrepreneurs prefer term loans, which are available for a specific period. They can be used to purchase machinery and equipment, meet working capital needs and other expenses. These are also referred to as working capital loans. The interest charged on term loans is generally fixed.
- Loans against Collateral – These are the most traditional loans available and small businesses opt for these for larger purchases like property etc. They are granted against some collateral which could be the borrower’s house or other property and other assets, if any. These loans are available at fixed or variable rates, and can be paid off in monthly installments spread out over a number of years. Small businesses get support from the U.S. Small Business Administration (SBA) that gives loan guarantees.
- Home Equity Lines of Credit – This involves applying for a home equity line of credit but for business use. This implies that the line of credit can be used only for business purposes though it comes at the same rate and with the same guaranty, namely the house. Non- payment of the credit taken will jeopardize the ownership of the house of the borrower. It is convenient in the initial phase of business when the entrepreneur has not yet got a credit history or payment record.
Small business finance needs can thus be met in multiple ways and it is for the entrepreneur to decide which one is best suited for his needs.