Nine Loan Options for Businesses

Todd A. Smith July 2022 ©

For most businesses, there comes a time when additional funding is necessary for growth, above and beyond an owner’s self-funding capabilities. Many companies struggle or even, unfortunately, fail due to the lack of capital resources.

There are predominantly three primary means to fund business: debt, equity, or grants. Debt is when a lending institution provides you with capital that needs to be returned with interest payments. Equity is an investment in your company requiring the business owner to relinquish part ownership in their company. Grants are funds provided by a grant-maker to be used for a specific purpose without the requirement of being returned. The specific purpose will need to be accomplished.  

Debt, Equity, and Grants are all useful forms of finance, and within each category, there are numerous types of funding, all with different application processes and requirements.  

Below are nine forms of debt financing that are available to fund your business.

Debt is not bad as long as there is value to you and your company. The key to acquiring any form of debt is the benefits must out way the liability of the debt and the additional drain on your cash flow.

1. Family and Friends– Borrowing from persons you know. Never discount the support you will receive from family and friends. The ability to borrow from a friend or family member depends on their financial situation. If you are fortunate enough, you may be able to obtain the money interest-free.
2. Term Loans – This is a loan with a set amount of money with specific monthly payments. Depending on how much money you require will determine which lending institutions will provide the loan.
3. Lines of Credit –    A lender provides a set amount of money that a business can use on demand. Interest is only paid on the funds a company uses. Most lines of credit require a “clean-up” period, which means there cannot be any outstanding balance during one calendar month of each year.
4. Government Backed and Guaranteed loans
   1. United States Department of Agriculture (USDA) Loans & Small Business Administration (SBA) offers loans to the business community that are partially guaranteed. The loan guarantees are in place to reduce some of the risks to the lending institution.
   1. Other than the EIDL, the Emergency Injury Disaster Loan. Neither the SBA nor the USDA are direct lenders. There are specific lenders that the USDA and SBA authorize to facilitate the underwriting and funding of these loans. The SBA loan programs will loan as small as $5,000.00 through their microloan program.

• Credit Cards – very much speak for themselves. Most of us use them frequently. Credit cards can be used to purchase materials and pay many other bills. Be careful not to overuse credit cards as they do come with high-interest rates. If you have excellent credit, there are many credit cards with 0% introductory offers. 
• Equipment Leases – The renting of equipment in lieu of ownership. The leasing company holds the title. Upon the end of the lease, there is typically an option to take ownership by a predetermined buyout.
• Purchase order financing – Commonly referred to as PO financing. is used by companies to pay suppliers to fulfill a specific order or contract when large cash outlays are required
  • For example, if a company receives a large order for new computers for a school district, all of the computers must be programmed. School district’s traditionally do not pay a deposit. To fulfill the contract, a company would purchase all of the computers using PO financing.
• Factoring This is the purchasing of a receivable and is not specifically a loan. To explain that comment further, one must consider whether this is a recourse or non-recourse factoring transaction.
  • Recourse means if the client does not pay the receivable, the vendor will need to repay the factoring company. Thus, the reason factoring is placed under debt.
  • Non-recourse factoring is solely based upon the credit worthiness of the client. If the client does not pay the receivable, the vendor is free from any obligation.
  • Frequently PO financing and Factoring work together—building on the computer example. The purchase order financing would allow the vendor to purchase the computers, and they work their magic on programming the computers. When the computers are shipped and the invoice is submitted. The factoring company purchases the invoice. The PO funding source is paid, and the vendor is paid.
  • Both PO financing and factoring are designed to enhance a company’s cash flow.
• Mobilization Funding – This type of financing is specific to the construction industry.
  • Many construction contracts do not come with a deposit, down payment, or initial funding; this is the contractor’s responsibility. Frequently contractors do not receive their 1^st payment until 60 days after the contract begins. To alleviate the financial stress of projects that do not allow for retainers or contract deposits, a builder would use mobilization funding to provide working capital.

There are many ways to fund a business for its growth and expansion. Which one is the correct loan product for you? The one that allows you to be profitable today and continues to provide long-term growth potential and opportunities.