Depending on your situation, you might have access to a wide number of funding options for your business. The issue is that you don’t know which one would be better for the short and long term future of your enterprise. You want to know the costs and consequences associated with each option. You also want to know which ones will be the most accessible, and which one will allow you to reach your goals. Others might be worried about getting approved. Let’s take a look at the pros and cons of some of the most common funding options for small and medium businesses.
Personal Loans
If you’re interested in getting a loan and don’t have an established business credit yet, personal loans are an option. You might feel like your personal credit is stronger and will give you a better chance to get accepted. And in many cases, you might be right.
There are a few issues with getting a personal loan, however. First, you will be personally liable if you default. You also have to note that the interest rate will usually be higher on these kinds of loans and that you will have a lower cap on the amount of money you can borrow.
Business Loans
The second option is business loans. These can be notoriously difficult to get, which is why some will not even entertain the option. But they might be wrong for doing so.
That’s because some alternative lenders will look far beyond your credit score to establish your creditworthiness. They will look at other metrics such as total debt, accounts receivable, and banking activity among other things. They understand that the credit score doesn’t tell the full picture, so these are the type of people you have to go to.
However, know that there are some drawbacks to business loans. Besides the fact that the application process is more strenuous than with most personal loans, chances are you’ll need to put up some sort of collateral, and this collateral will go in case you default. At the same time, business loans allow you to separate your business’s finances from your own.
Invoice Factoring
Invoice factoring can be an interesting option for people who might have a lot of account receivables who are not in the best situation credit-wise. Invoice factoring allows you to invest against invoices that are due to you at a later date. The lender will then not only lend you a percentage upfront but take the responsibility of collecting the invoice for you.
The main benefit of invoice factoring is that your clients’ credit will be the main determining factor here. The main drawbacks include short terms, lower lending limits, and overall costs.
Conclusion
These are some of the avenues that you could consider if you’re trying to get your SME off the ground. Look at all the options that are at your disposal and take the time to weigh the benefits and disadvantages of each before you make your final decision.
