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What are the Different Types of Business Funding
There are many types of business funding and financing.
Certainly, entrepreneurs and business people have access to many types of business funding and financing options. Each one has its pros, minimum requirements and optimum use cases. The following lists some of the main categories:
As a sub-category of Debt Financing:
– Bank loans
– SBA loans
– Business lines of credit
– Equipment financing
– Invoice financing/factoring
– Merchant cash advances
– Revenue-based financing
Equity Financing:
– Angel Investors
– Venture Capitals
– Private Equity
– IPOS (Initial Public Offerings)
– Equity Crowdfunding
Alternative Funding:
– Grants
– Reward-based crowdfunding
– Incubators and accelerators
– Strategic partnerships
– Friends and Family funding
– Bootstrapping (self-funding)
Each type of funding has a diverse cost range, control implications, repayment terms, qualification outlines, and other requirements. The optimum choice is dependent on your stage in the business, industry, growth goals, and financial standing.
Would you like to explore a specific type of funding in greater detail?
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4 Replies
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Great topic George. Can you cover all types of business funding with special emphasis on MCA, Factoring, Equipment Leasing, Lines of Credit, Credit Card Processing, Invoice Financing, and other types of business funding and financing. Thank you.
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Sure, Gustan,
Worry not, as I can help you understand every single type of business funding or financing option available, especially the ones you mentioned.
Business Funding and Financing Options
Traditional Debt Financing
Bank Loans
- Traditional bank loans provide lump-sum funding with fixed or variable interest rates.
- These loans usually require a good credit score, an established business history, and sometimes even collateral.
- Loans for working capital are usually between 1 and 10 years, and for commercial real estate, up to 25 years.
SBA Loans
- The Small Business Administration backs these loans and offers better rates and longer repayment terms than traditional bank loans.
Some of the more popular programs are:
- SBA 7(a) loans – General purpose business loans, ranging up to 5 million dollars.
- 504 loans – Used for purchasing entrenched fixed assets, including equipment and real estate
- Microloans – People wanting lesser amounts, up to 50,000 dollars.
Business Lines of Credit
Business lines of credit enable easy and quick access to funds up to a certain limit. The business only pays interest on the amount drawn from the line of credit, perfect for cash flow fluctuations and unexpected expenses. They can also be secured or unsecured. Secured loans come with lower interest rates but require collateral.
Alternative Financing (Your Featured Choices)
MCA Merchant Cash Advance
- MCAs provide up-front cash in return for future credit/debit card sales and a fee.
- MCAs do not charge interest.
- They instead use a factor rate (commonly 1.1-1.5) and apply it to the advance amount).
Important components:
- Fast approval and funding (historically days).
- There are no fixed monthly payments; payment changes with sales.
- Higher cost compared to traditional loans.
- Few documents are required.
- Available to businesses even with poor credit.
- Ideal for businesses with high volumes of transactions via credit and debit cards.
- Factoring Rates yield around 40-150% APR if converted.
Factoring
- Invoice factoring sells receivables at a discount to a third party (factor).
- The factor pays 70 and 90% of the invoice value upfront and then pays the rest (minus their cut) after the customer pays.
Features:
- Easy and fast access to unpaid invoices
- Business’s creditworthiness does not dictate approval, but rather the customers’
- It can either be recourse (you’re responsible if customers fail to pay) or non-recourse
- Normally, between 1-5% of the invoice value and often charge a processing fee.
- This is particularly beneficial to B2B firms that have longer payment cycles.
Equipment Leasing
- These allow businesses access to specific equipment without full payment permits for purchase.
- The business rents the equipment from the lessor (the leasing company).
- The leasing company becomes the owner of the specified machinery.
Types of Equipment Leasing:
- Operating leases: Lower payments for shorter terms. Equipment needs to be returned afterward.
- Capital/finance leases: Longer terms of renting equipment with an option of owning it
- Sale and leaseback: Selling owned equipment to a leasing company and taking a lease for them
Benefits of Equipment Leasing:
- Important credit lines and capital reserves are kept intact
- This may include maintenance and upgrades.
- Potential tax perks
- Often easier to qualify for than loans.
- Flight equipment is becoming obsolete.
Invoice Financing
- Similar to factoring, the business can control the collection process.
- The lender offers a percentage of outstanding invoices (normally 80-90%) for a fee until the invoice is settled.
- The lender then charges a weekly fee until the invoice is paid.
Differences from factoring:
- You keep the customer relationship.
- Customers do not know the financial details of the deal.
- Often more flexible compared to factoring.
- Weekly payments usually equal 2 to 4 percent a month.
Credit Card Processing Loans
These funding options are directly related to the volume of credit card processing. We may provide:
- Cash advances are based on the history of processing available.
- Loans are paid back with a daily percentage of the card transactions.
- Special financing for processing equipment.
- “Split funding,” where a processor automatically withholds some daily sales to pay towards a loan.
Other Important Funding Options
Asset-Based Lending
- Loans secured by business assets such as inventory, equipment, or real estate usually have higher limits than unsecured loans.
Purchase Order Financing
- Financing that allows businesses to fulfill larger orders than they can manage.
- The lender pays the supplier directly, and the business is reimbursed after the customer pays.
Revenue Based Financing
- Funds are given to the business in exchange for a portion of the ongoing revenues until a set amount is repaid.
- This amount should be 1.5-3x more than the initial investment.
Equity Financing
Obtaining capital by exchanging ownership shares from the following:
- Angel Investors: Individual investors who put money into startups.
- Venture Capital: Investment firms focusing on publicly traded small company growth firms.
- Private Equity: Later-stage investment firms concentrating on established growth firms.
- Public Markets: Through Initial Public Offerings or secondary offerings.
Crowdfunding
- Reward-Based: Backers receive perks or set products (Kickstarter, Indiegogo).
- Equity-Based: Investors receive company shares. (Republic, Start Engineer)
- Debt-Based: Lending with payback terms (Funding Circle).
Government Grants and Programs
- Funds that require no payback are given to assist specific funds, demographics, or research in specified industries.
Strategic Partnerships
- Securing capital via joint ventures, advanced orders from major corporations, or licensing contracts.
Funding Choice Considerations
Strategic partnerships assist in selecting lower-priced funding options. The correct decision hinges on these conditions.
- Business stage along with the credit profile.
- Purpose and timeline of the intended spending.
- Line of business along with the trade and model of the industry.
Patterns of cash flow.
- Combining financing options with control or share of equity.
- Access to collateral.
- Acceptable limits of expenditure.
- Tolerable cost.
Do you want deeper particulars about some other form of funding I have provided? Also check out our business and commercial lending division of Gustan Cho Associates, Lending Network, LLC
https://www.lendingnetwork.org
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Where can I get a list of direct wholesale business and commercial lenders where they welcome business and mortgage brokers?
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Identifying wholesale lenders who deal directly with companies and work with mortgage brokers requires some digging, but several helpful tools are available.
Industry Associations
- You have the National Association of Mortgage Brokers (NAMB).
- Then, there is the Commercial Finance Association (CFA).
- The AACFB American Association of Commercial Finance Brokers.
- The NEFA National Equipment Finance Association.
Online Directories and Marketplaces
- You also have Scotsman.
- Funding Tree.
- ConnectOne and other FinanceHub members.
- Commercial Loan Direct.
Networking Events and Conferences
- You have the Finance Expo and the National Mortgage Brokers Conference.
- Then there are the ELFA conventions.
LinkedIn Groups and Forums
- Commercial Lending Network.
- Mortgage Professional Network.
Commercial Real Estate Finance Professionals.
- Broker-Friendly Wholesale Lenders
The following are broker-friendly wholesale lenders with direct deals.
- Ready Capital and Silver Hill Funding for commercial lending.
- The same goes for Intercontinental Capital Group and Liberty SBF.
We have United Wholesale Mortgage, Hotpoint Financial, Flagstar Bank, loanDepot Wholesale, and Caliber Home Loans for mortgage lending.
I suggest the relevant industry associations first. Many wholesalers attend regional broker finance events to recruit. The associations will keep you updated with catalogs of wholesale lenders and will negotiate the best terms for association members.
Is there a specific type of wholesale lending you would like information about? Where does the consultant come in as a broker?