Borrowing Money: 5 Ways Businesses Obtain Financing

When it comes to borrowing money, how many of us think solely in terms of consumer financing – like getting a mortgage or applying for a car loan? It turns out that businesses borrow money, too. They have financing needs related to cash flow management, capital expenditures, and business expansion. The question is how they go about it.

Just as consumers have multiple options for financing purchases, businesses have a number of choices to look at. Where they eventually go for financing depends on the amount they want to borrow and how they intend to use it. Here are five ways businesses obtain financing:

1. Small Business Loans

Our penchant for thinking in terms of consumer lending leads many of us to immediately think of small business loans as a financing tool for commercial needs. More than one small business owner thinks of these loans first. Sometimes small business loans work, other times they do not.

Small business loans are offered by banks. In most cases, they are supported by state and federal lending programs designed to promote small business in America. The unfortunate thing about small business loans is that they are notoriously difficult to get. Business owners need to jump through hoops to arrange even the smallest loans.

2. Hard Money Loans

Hard money loans are made by private lenders who make their approval decisions based exclusively on the value of the borrower’s assets. As an asset-based lending tool, hard money can go toward funding business expansion, acquiring property, or even restructuring debt.

Businesses appreciate hard money because it is easier to get small business loans. But according to Salt Lake City’s Actium Partners, a hard money firm that specializes in real estate, loans are subject to very short terms and higher interest rates.

3. Invoice Financing

Businesses sometimes raise cash through a tool known as invoice financing. Also known as factoring, invoice financing is a scenario in which a business sells unpaid invoices to a factoring company. The business gets a certain amount of cash up front and the rest when the invoices are paid.

Invoice financing is a great tool for managing cash flow. It helps small businesses stay afloat when cash flow gets a little tight.

4. Supply Chain Financing

Supply chain financing is similar to invoice financing in some ways. However, the major difference is that it works in the opposite direction. Rather than companies selling invoices, customers arrange financing to pay their invoices early and at a discount. Doing so reduces their costs and buys them a bit more time to pay what they actually owe.

5. Business Lines of Credit

Finally, small businesses often have access to the commercial version of a consumer line of credit. A bank or private lender will extend a line of credit that operates on a revolving basis. The line of credit might include credit cards issued to company owners or officers.

This sort of arrangement is very similar to its consumer equivalent. Let’s say a business is granted a line of credit worth $10,000. As long as the business makes its monthly payments on time, it can borrow and maintain an outstanding balance up to the limit.

Despite the many options available to small businesses, commercial borrowing is complicated. There are a lot of moving parts to deal with. Fortunately, business owners have enough options to meet virtually any financing need. It is really just a matter of matching the need with the most appropriate financing tool.

And now you know how small businesses obtain financing. It is not all that different from how consumers borrow money.