So, you want to start a business? There are several factors to consider, of course, but one of the first things that comes to mind is, “How am I going to get money?”. Starting a new business definitely isn’t cheap. And even when your business is established, you still have to figure out where you’re going to get money as it continues to grow.
Many people don’t know, but there are actually a few different paths you can take to obtain the funding you need – whether you’ve been up and running for a few years or if you’re just starting out.
So, what lending path is best for you? Let’s walk through the options.
1. Credit Based Funding
This type of funding is just like it sounds, it’s based on credit. This is actually the most common way for businesses to maintain funding, especially when they are brand new. This is because there’s not really much documentation required. You don’t have to have any established income or assets; this funding typically comes from either personal or business credit cards. So as long as your credit is decent enough, you’ll be able to qualify for this path. Starting a new business is exciting and you likely want to get started quickly. This route helps you do just that because there’s no underwriting involved and you don’t have to wait for a bunch of documentation to be processed. Actually, some of the bigger businesses that you think of started out by obtaining their start-up funds from credit cards, like Amazon and Tesla.
2. Revenue Based Funding
If your business has been around for a little while or if you have future income coming your way to support you, this path might be the way to go. Revenue based funding is based on either current revenue that you’re bringing in or on future revenue. There are several categories that fall under this path including purchase order financing, lines of credit, and revenue loans, to name a few. This path is going to require proof of income which is why it’s not the route to take if you’re just starting out. You’ll need to have everything from your tax returns and profit and loss statements down to your personal financial statement and even any future client invoices that you’re expecting to come in.
3. Asset Based Funding
Asset based funding is all about using an asset as collateral to obtain money for your business. This path is used in a few different areas but most commonly you’ll find it in real estate. Actually, any type of real estate loan you can think of falls along this path. This even includes real estate investors who want to purchase and flip properties. While your credit doesn’t really play a huge part in asset based funding, it will still likely be used to determine your interest rate as well as the terms of the loan. The whole purpose of this type of funding is that it allows you to obtain the money you need, but it also mitigates risk because you have collateral to back it up.
There are also a few non-traditional routes you can take to get the funding you need for your business like crowdfunding, venture capital and even family members, but these 3 that I mention above are the most common.
The one thing you need to keep in mind no matter where you’re at in your business journey is that you want to work with a trusted professional who is knowledgeable about the lending process and can walk you through your options to help you understand the best path to take.
Starting and owning a business takes a lot of work but if you know the right paths to take to obtain the funding that you need to start or grow your business, you’re off to a good start.