Every entrepreneur’s journey starts with finding ways to fund their small business. Sponsors can be individuals, groups, or financial institutions like banks.
Small business funding is necessary for your business to stay afloat. It also acts as a safety net during global crises or low sales. Small and mid-size enterprises (SMEs) can take advantage of different business funding options and make a more personalized experience.
If you’re starting a new business or need advice on small business funding, this guide will help you learn all you need to know about it and how to navigate it effectively.
What is Small Business Funding?
Small business funding refers to financial support an aspiring business owner receives to run a small business. It also extends to purchasing an already established business or investing financial resources into another small business’s future activities. Startup financing and franchise financing are also alternative names to this concept.
Small business financing is necessary for small businesses since it effectively allows for day-to-day functions and promotes long-term growth. Small companies usually look to request funding if they need working capital or assets for development and other similar ventures.
- How Does Loan Amortization Work for SMEs?
When businesses borrow money from banks, they usually take out an installment loan. The process of scheduling a fixed-rate loan into equal payments is called loan amortization, and it’s often done semi-annually or annually.
Additionally, an amortization schedule shows you the amount of interest and principal value of each payment. A loan payment’s principal is the amount you borrowed from the bank, while the claim is the charge you incur throughout the loan’s lifespan.
Each periodic payment is the same, except when you begin the process, most of the amount paid goes to interest. Over time, the percentage of each payment going to interest decreases while the share going toward principal increases.
By this point, the principal is a more significant portion of each periodic payment. Debt to the bank is amortized if paid in equal installments throughout its term.
How Does Small Business Funding Work?
Business loans give you and your business financial payments, either in lump-sum or through credit, to kickstart your business ventures. In exchange for this investment, you repay the same value through periodic payments over time. The frequency of compensation depends on the type of loan your business availed and ranges from payments made daily to monthly.
It would help if you had an arrangement suitable for your business needs. To avoid risking your business’s finance, you need to understand how applying for a business loan works.
As a pre-requisite, most loaning bodies in the Philippines have businesses submit several documents before being considered for funding. Examples include government identification, company background, financial statements, and registration certificate. Refer to the list below on how to get a business loan.
Identify how much funding you need
Before applying for a loan, you’ll need to know how much money you need to fund your small business. It’s a waste of time if you go to a bank or other financial authorities without knowing what you want.
You should ensure that the amount you’re borrowing is realistic and not too high. Otherwise, the lending party can doubt your capacity to pay it back. Likewise, requesting an amount that’s too small results in your loan being rejected almost immediately since banks can’t profit from it.
Learn about the requirements
Banks and similar entities are typically the hardest to qualify for when applying for a loan. Usually, lending authorities in banks require borrowers to meet a minimum standard for credit score, business revenue, and years in operation. Understanding the minimum requirements and qualifications increases the chances of your loan getting approved by the bank.
For other common sources of loans, like online lenders, the requirements aren’t as strict, and you can qualify for a loan even if your credit score isn’t as high. In both cases, however, you’ll need to provide paperwork and documents, such as bank statements, tax returns, and business plans.
Develop a business plan
A business plan is a great way to show lenders how you plan to use their money. Having a dedicated business plan also builds investor confidence in your business.
When making a business plan, you should strongly consider the nature of your business, the product or service you plan to sell, what your team is like, marketing strategies, roadmaps, and financial plans and projections.
Assess the amount and frequency of your payments
Your business’s revenue dramatically affects the chances of getting your loan approved. As such, while applying for a loan, it’s essential to consider how often you’ll be paying and how much you can afford to pay. You should also factor in the frequency of when you pay and if you can afford to pay it daily, monthly, or semi-annually.
Choose the loan type best suited for your business
Every business is unique and has different needs. Small business funding schemes are popular since they offer various options business owners can choose from. Common loans to small businesses include short-term loans, equipment loans, term loans, and invoice financing.
Small Business Funding Facts and Statistics
Financing is a company’s most necessary tool to operate effectively. Small business funding has seen numerous successes over the years and is offered in most countries.
Small businesses make up 99.9% of all companies in the US, equivalent to 32.5 million businesses as of 2021. A similar majority is also observed in the Philippines, with small businesses also employing 62% of the country’s workforce.
To better understand funding’s importance, a study by a US bank showed 82% of businesses fail because of poor cash flow management, while another 38% close their businesses simply because they ran out of purchasing capital.
The Philippines also faces similar problems. In a survey by Mambu, a cloud banking platform, 3 in 4 Filipino small and mid-size businesses have been unable to secure sufficient business funding over the last five years.
After failing to secure the necessary financing, 48% have cited that they experienced issues regarding cash flow. Meanwhile, 48% of the surveyed businesses were also unable to launch new products or services, and 35% struggled to repay their creditors.
Moreover, loans can also be rejected by lending entities, another hurdle businesses have to face when applying. A less-than-ideal credit score, insufficient years in operation, poor collateral types, existing debt, and operations within a risky industry were all cited as common reasons for rejecting loan applications.
Depending on the loan type and arrangement, loan values in the US range between $20,000 to $545,000. In the Philippines, lenders provide applicants with loans ranging from P100,000 to P20 million.
What are the Common Types of Business Funding?
One of the biggest appeals to small business funding strategies is its flexibility to accommodate many applicants and cater to their personal needs. Below are some common types of funding being offered.
Bank loans are arguably the most conventional lending source relative to other means. It requires businesses to submit various documents, including profit information, business plans, and financial histories. Because it’s a financial institution, bank loans are sought after as they act as safety nets for businesses.
A business line of credit
Similar to a credit card, this type of funding is based solely on your credit limit. Two types exist: secured and unsecured. For the former, you’re required to provide collateral against the line. The latter may not require collateral but can still ask for personal guarantees. Interest is paid only during the money draw.
Crowdsourcing sites are also viable methods for getting extra cash to start your business, with websites like GoFundMe and Kickstarter being prime examples.
Unlike the traditional applications from banks, crowdsourcing relies on having an exciting and engaging storytelling experience worth investing in. The probability of your success hinges on how well you appeal to the online community.
At the beginning of your business venture, you can generate financial resources through savings or with the help of your friends and family. The value you get here might not be as much compared to other lending options, but repayment is usually more flexible than others.
Usually an individual with a high net worth, angel investors lend funds to businesses in exchange for a stake in the company. Since their goal is to have a position within the company, they’re more likely to invest larger capital.
Many in this category are involved in private equity, so businesses looking for loans should pitch their business plans, financial statements, and other relevant information before being granted a loan.
How to Know What Type of Business Funding is Right for You?
With so many options being offered, you might find yourself overwhelmed. You’re now faced with picking based on your business, but how can you decide? Not to worry, below are some steps to ensure the first loan you apply for is best suited for you!
Before doing anything, you’ll need a rough estimate of what kind of funding you need and the subsequent amount. It also includes conducting a background check on your own business, its financial track records, credit scores, and debt-to-equity ratio. At this stage, you should be realistic about your loan and apply for what you need.
Consider your future financing needs
Do you see your business operating at a more large-scale level in the future? Are any possible expansions on the horizon? If the answer is yes, add it to your list of considerations when applying for financial loans. By acknowledging what you might achieve in the future, you can plan for better decision-making.
Look at the repayment terms
Identify how much time you have to pay off the loan and look for one with schedules you can confidently abide by. Additionally, ask yourself if your business can finish paying the loan early or does it need to wait until maturity. Proper assessment and decision-making help save you money in the long run.
Consider interest rates
Although it shouldn’t be the deciding factor, you should also calculate interest rates. It would be best to be smart when comparing rates since, depending on what you choose, small percentage changes can make all the difference in the grand scheme.
Take your time
Be patient with navigating through the loan application process and evaluate everything carefully. Always remember to take things slowly and to think things through before deciding. Rushing through the process results in disastrous outcomes and jeopardizes your business’s financial capabilities.
Top Financial Challenges Small Business Owners Can Expect
Throughout the lifespan of your business, you’re bound to come across challenges along the way. While many can be mitigated or alleviated by small business loans, others can be avoided by the business itself.
No budget plan
A business with no budget plan is a recipe for accumulating debt and irresponsible handling of company finances. Having a plan and abiding by it helps you grow and expand to better things. Additionally, the budget should be regularly updated and adjusted to current market climates.
Financial reporting negligence
As a form of good practice, businesses should always keep a track record of all their expenses or activities that require financial resources. Neglecting to accurately declare your financial records leads to financial losses or interest charges. The snowball effect impacts your company’s cash flow and financial capabilities.
Too much debt
Accumulating too much debt at any point in your venture has different short- and long-term consequences. You might have to tap into a portion of your profits just to pay off the debt, resulting in revenue losses that you could have used for other business projects.
No preparation for unforeseen expenses
Expenses not anticipated by your company can significantly impact your plans. As such, having an emergency account specifically for unforeseen expenses cushions your business in times of distress or crisis.
Late bills payments
Failing to pay your bills on time costs your small business, even if you think it’s harmless. The most notable area this affects is your credit score, which is one of the important metrics needed when applying for a loan. When you have a poor credit score, you might find it harder to find entities willing to grant you loans.
Benefits of Applying for Business Loans
Applying for business loans opens many doors for small businesses everywhere. Apart from giving you initial capital, it also lets your business have accomplishments and growth opportunities which they otherwise couldn’t have experienced without the startup capital. Find other benefits of applying for loans below.
Full control over the borrowed money
You don’t have to split the borrowed money between investors or other shareholders when you’re given a loan. It’s meant solely for the benefit and future of your business. As such, you don’t have to worry about other people or entities interfering with your decision-making.
Interest rates are usually low and affordable
Banks and similar institutions offer competitive rates to their customers. While interest rates depend on your loan amount and arrangements, they’re generally low, so more customers are encouraged to apply. Interest rates for business loans are also much cheaper because there’s high competition for customer attention.
Flexible and convenient
Small business loans have a large pool of options to choose from, so businesses looking to apply can have a more convenient, hassle-free, and personalized experience. You can even have different durations for repayments or loan shelf-life, like long-term and short-term.
The application process is easier than others
Applying for a business loan is a challenging process, but relative to other types of loans, it’s easier to get approved. After pitching your intention for a loan and meeting the minimum requirements, you can get approved. Ensure you submit documents like business plans and financial records throughout the application process.
Improved business credit
Once you have a track record of business loans, regularly pay on time, and repay accordingly, you can boost your business credit and reputation. Finding financing opportunities with lower interest rates becomes much easier when your business achieves this.
Achieve Now, Pay Later!
Small business funding is a great way to give your small business the tools and opportunities it needs to thrive in its industry. Additionally, it plays a big role in a company’s survival, especially in today’s market landscape. With many options to choose from and several benefits, the possibilities for your business are virtually endless.
If you’re planning to start your loan journey today, consider checking out JK Capital, an online lending company specializing in loans and other related services. For services relating to business loans or loan applications, reach JK Capital and our team of experts via the contact page.