One of the main issues any growing business needs to address is how to establish financing and credit. Whether your business is just starting out or has been operational for years, securing outside financing sources can serve as a growth engine and, at times, a lifesaver. 

While the lending solutions market is vast and complex, the choice between credit offerings doesn’t have to be. To help you make the right choices, we’ve outlined below some of the most popular ways for small and medium-sized businesses (SMBs) to secure financing. 

Business credit cards

Credit cards issued to businesses often come with unique terms and benefits designed specifically with their needs in mind. Credit cards allow your business to defer payments and free up cash while living up to its financial obligations.  

Lines of credit

Flexible loan options that pre-approve a given sum of financing for businesses and only charge interest on the money withdrawn from the credit line. 

Business/merchant cash advance 

A loan from cash advance companies or credit card processors that lends against a business's future earnings. They are repaid by dedicating a percentage of credit card sales to the lender. 

Secured and unsecured Loans

The difference between these loans is that the former requires collateral from the beneficiary at lower interest rates and the latter requires no collateral but usually has a higher interest rate or stricter terms.  

Microloans

Small lump-sum loans issued by individuals instead of by financial institutions, banks, and credit unions.  

SBA loans

These are loans for small businesses that are guaranteed by the US Small Business Administration. Due to the government’s involvement, rates and terms for these loans are favorable towards small businesses.

Equipment financing  

A loan taken specifically in order to pay for tools or equipment required for the operation of your business. 

To fully evaluate the merits and drawbacks of each method when it comes to your own business, you’ll need to ask yourself these 3 important questions:

1. How much money do you actually need? 

A clear understanding of your business’ financing needs will give you valuable clues in terms of which type of credit would best meet them. 

For instance, a business credit card or line of credit is a great option if you need to quickly set up and cover day-to-day company-related expenses since funding takes only hours or days to procure. However, these methods come with relatively high interest rates, especially for newer businesses or those with a lower total income level. 

Microloans and equipment financing loans are excellent choices when you need to pay for specific machinery or in-store improvements, but the path to funding may be longer, requiring weeks or even months worth of paperwork and evaluations. 

For a more detailed look at the terms of each option, check out the handy lending guides created by SCORE (The Service Corps of Retired Executives), a non-profit organization that provides free consultation to entrepreneurs.

Keep in mind that t’s never a bad idea to consult with financial advisors, accountants, or even fellow business owners before taking on new financial obligations. Especially in these Zoom-infused times, many professionals are willing to share their knowledge and expertise for free or for a nominal fee via webinars, professional networking groups, and online mentorship events, so don’t be afraid to reach out and ask for help if you feel overwhelmed by the multitude of financing options and lenders out there.

2. Will your business qualify for credit?  

Even if your personal credit score is great, that is no guarantee for your business’s score. This is because lenders often look at other credit qualifiers such as the age of the business, its annual revenue, cash flow, and available collaterals to get a clear picture of the organization’s overall eligibility for credit. 

Some credit options, such as a line of credit, require businesses to be in operation for at least 1-2 years to qualify, and these conditions can vary significantly from lender to lender. 

Since younger businesses are considered more risky investments, interest rates may also be higher during this early 2-5 year window, so, if possible, you would be wise to wait until your business is more mature and your finances are in good financial health before applying for the first time. 

By the way, paying your bills on time is a great way to improve your business’s credit score, so it’s always a good idea to adopt an efficient bill pay tool, such as Melio, that lets you schedule payments in advance and get a clear view of your finances. 

3. How soon do you need the money and when can you pay it back?

For better or for worse, hasty decisions influence long-term results. Taking on new financial obligations may be a necessary step for growing your business but it’s crucial to go into it with a clear head. 

Rather than being at the mercy of lenders or high-interest rates just because you needed capital fast, always try to secure your financing channels well in advance, never borrow more than your business can realistically pay, and form a well-thought-out repayment plan that fits both your needs and your abilities. 

And, if you only need a little extra float, remember you can always use Melio to pay your business bills with a credit card. This way, you can easily defer payments until your next billing cycle and increase your business’s cash flow, without having to apply for credit or fill out any forms. 

If you follow these tips, as well as some good old-fashioned, real-world advice, it will be easier for you to identify the right mix of financing offerings for your small business.  Trust us, your bank account and cash flow statements will thank you!