Best Business Funding Options in 2021

A personal savings account is by far the best business funding option you could choose. After all, it doesn't require you to pay back, and it doesn't involve those pesky increscent interest rates. However, saving money is definitely not an easy task, as it requires enormous effort and years of planning ahead. That's why business owners and entrepreneurs typically choose one of the alternative funding methods.

In this article, you'll be able to read about the best financing options for a business available today. Each of them comes with its own set of pros and cons, so make sure you read up on them before making any final decisions.

Debt vs. Equity — Know the Difference

Debt

Essentially, debt is a business loan issued by traditional and online banks, as well as any other kind of lender.

Debt can be either secured or unsecured, the former requiring a sort of a guarantee in the form of assets. In case the borrower doesn't repay within the agreed amount of time, the lender can take away their assets.

Equity

Equity is also a type of loan. However, unlike debt, equity doesn't require the borrower to pay back with money but rather by giving away a percentage of their company, i.e., company shares.

There are also variations and combinations of these two categories. For instance, convertible debt can act as a regular loan but allows businesses to pay it off using company shares later on.

SBA Loans

The Small Business Administration offers all kinds of financing options for small businesses and start-ups. The following are their most popular programs.

Keep in mind that in order to acquire any SBA loan, you need to have a good business credit card score.

SBA 7

SBA 7 is the most common funding program for businesses with special requirements. It can help businesses cover up to $5 million in funds, offering both short-term and long-term capital.

SBA Express

Although it allows for small loans only (up to $350K), SBA Express does offer quick turnarounds. In essence, it's a faster version of SBA 7.

SBA Microloans

Similar to Express, the SBA Microloans program also has a lower top limit, which is $50K in this case. It's perfect for startups and businesses that are still in their initial phases.

SBA 504

If you require some larger purchases, such as real estate, vehicles, or expensive equipment, you can choose the SBA 504 program and receive up to $20 million. It's one of the most optimal financing options for business expansion and large-scale projects.

Business Credit Cards

A business credit card is yet another financing option that depends highly on your business and personal credit card scores. Still, if you can meet the criteria, there are many benefits to using them.

For one, they can prove to be a good emergency financial aid. Moreover, they allow for easier financial management by allowing you to keep track of each expenditure, create thorough budget plans, and effortlessly cover all the taxes.

The best part is — some credit cards offer cashback rewards for your purchases, typically in the form of cash, credits, or other goods, such as airline tickets.

Invoice Financing

This form of financing applies only to businesses that already sell their products or services on a regular basis. In short, invoice financing or factoring allows businesses to cash in invoices that the customers haven't paid yet by borrowing the money. The lender typically advances around 80% of the total sum, which the borrower then returns once the customer makes the payment.

The main advantage of invoice financing is that it enhances the cash flow. New and prosperous businesses can get immediate funding while they wait for their payments, which can oftentimes be slow.

On the other hand, there are also a few caveats you should be aware of. For instance, the lender could ask for monthly payments or even take it upon themselves to manage your customers' payments. Therefore, make sure to study the contracts in great detail before making any decisions. The same goes for any other business funding option you might be considering.

Angel Investors and Venture Capitalists

These two types of financing options are similar in that they involve the selling of equity. In addition, in case the business fails, and all the money is lost, both types of investors will simply lose the money, not requiring anything in return.

Even though it can help businesses gain tremendous success rapidly, equity financing does require you to give away a significant share of your company and take in a partner. In that case, not only will they take some of the profit, but you will also have to consult them about all business decisions.

Angel Investors

Also known as "angels" in the financing industry, angel investors are typically wealthy individuals willing to put their money into various projects they deem propitious or interesting. Aside from funding, angels can also provide their expertise and contacts. And as you probably know, that can be crucial for the success of any business in its early stages.

Venture Capitalists

Unlike angels, venture capitalists are big companies with even bigger budgets. They look for potentially profitable businesses and invest large sums of money in them, typically millions.

Crowdfunding

Crowdfunding is a form of financing that typically involves donations from people who are interested in your idea and wish to see it come to fruition. It's all the rage nowadays, in the time of social media and influencers.

If you already have a following, you will most likely reach your financing goals in no time. If not, you'll need a bulletproof marketing strategy to get yourself noticed.

Crowdfunding is definitely one of the best as well as least binding ways to fund your business. In fact, it's totally free (minus the platform fees and other minor costs). On the downside, this type of funding can be nearly impossible to acquire, considering that the competition is tough.

Grants

Emerging businesses can also get funding in the form of grants from private companies, community and non-profit organizations, as well as the government. However, much like with crowdfunding, you have to compete with thousands of other bright-eyed entrepreneurs much like yourself.

Final Thoughts

That was our overview of the current best financing options for a business. Keep in mind that every business has its own requirements, which are crucial in determining what business funding you should go with. For instance, if you're a financing novice with a unique idea full of market potential, the angel investor's generosity and experience could surely come in handy. On the other hand, if your business is already well-established and you're looking to expand, an SBA loan is a smart choice.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes