If you plan to start your own business as a sole proprietorship, you will face difficulty in getting business capital. This is the reason why entrepreneurs prefer to start partnerships. The idea is to gather the resources, or two or more business owners so that the startup gets a steady flow of capital in the initial phase.
What is Business Capital?
Business capital can be described as the financial assets required to produce and offer goods and services to the customers. It is believed that every business needs capital to seamlessly maintain its operations. Depending on your need, a business capital is available to business owners in the form of debt or equity. Some businesses prefer to obtain finances through debts i.e. getting a business loan which the company has to repay in the coming future. In contrast, other businesses prefer to sell equity in return for a financial investment.
Typically, a business capital is known for tangible items that include inventory, equipment, real estate, cash in hand or bank, and more. However, it is also applicable to any other things that potentially generates wealth for a business. This could include brand names, patents, and other related items. In simpler words, this type of capital can be anything which a business can sell for making money as and when required. The definition of business capital in accounting and marketing world is different. The first refers to business’ value as per in the balance sheet where the latter is the public perception of the brand and other related intangibles.
Regardless, there are multiple ways to raise capital for your business. As a sole proprietor, the primary step should be to consider investing money yourself to raise the capital. Not all business owners have large pockets to fund their businesses – thus, they rely on their life savings. But, what happens if they hardly have any resources to invest?
There are multiple ways using which you can obtain business capital for your company despite having bad credit. Here are some options that you can consider to raise working capital for your business:
OPTIONS TO RAISE BUSINESS CAPITAL
- Bank loans: If we talk about debt financing, banks are the supermarket for businesses to which they turn for short or long-term financing. Whether you are looking for working capital, inventory, real estate, or equipment, bank loans can facilitate all types of financial needs of a business. In addition to this, bank loans can help businesses to generate cash flow to cover interest payments as well as return the principal to the lender. The only thing that the banks want, before providing the required business capital, is assurance that the business will repay the amount in full. For that matter, banks require some sort of collateral or personal guarantee in the form of secured interest or personal asset. Unlike other, bank loans offer flexibility to customers where they have the option to repay the amount in full early and terminate the agreement.
- SBA 7(a) loans: The most popular and preferred loan option that is federally sponsored is SBA 7 (a) loans. Apart from this, the interest rate also varies from application to application as the amount of loan differs. The smaller the amount of loan, the higher you will be quoted the interest rate. It affects the credit flow by guaranteeing that the lender against the loss observed on a loan. More so, banks are not careful while making 7 (a) loans. Typically, they have to keep the non-guaranteed portion on books at all times. Therefore, it is better to shop around and look for multiple options when you are going for a SBA 7 (a) loan to raise business capital.
- Credit Card: Another option that is riskier to go for is using credit card to fund your business. In case there comes a situation in which you fall behind your payment, your credit score will have a negative impact. Further, if you are only making minimum payments each month, you are digging a hole for yourself. Minimum monthly payments create a problem for businesses in the foreseen future. But, if you carefully and responsibly utilize credit card to raise business capital, you can easily get out of an occasional jam with extra infusion of money.
- Small Business Loans: Businesses who have recently entered the market and did not have sufficient time to build their credit score or generate higher revenues prefer small business loans. In addition to this, businesses who fail to secure loans through traditional options such as banks, can turn their attention towards alternative lending options and microloans. If you require a business capital ranging between $1,000 and $45,000, a small business loan is an ideal option for you. There are numerous SBL lenders available in the market who will facilitate your application regardless of what banks think. Whether you need a smaller or larger amount without getting involved in tedious processes, choose small business loans.
- Merchant Cash Advance: Also known as MCA, a merchant cash advance is a lump sum amount that a lender provides in return of your future credit and debit card sales. MCAs are also called credit card receivable funding which has become a popular alternative lending option to raise business capital. The only criteria that an MCA lender will look for is to have a good volume of predictable credit card sales. Depending on your need and type of business, providers will quote you different terms and factor rate. If you are a business that exists for a minimum of six months and generate $10,000 or more in sales on a monthly basis, you are eligible and have higher chances to get approved for a merchant cash advance. However, all of it depends on your credit card sales volume.
Merchant Cash Advance Compared to Other Options
There are various reasons why small businesses and startups have started to prefer MCAs over other loan options to raise business capital. If we talk about merchant cash advances, the majority of the lenders will take a few days to one week for approving and transferring the amount to your account. As MCA is not considered as a loan, you do not have to be concerned about interest rates. However, MCAs come with a factor rate that depends on how risky your business is. A factor rate is similar to interest rate but it is a fixed percentage that is decided beforehand. On average, businesses are charged around 1.2 to 1.5 percent of the loaned amount. When compared to other options such as SBA loans, term loans, small business loan, and more – merchant cash advances are a viable and flexible option that allows all types of businesses to maintain its operations. In addition to this, it is a quick and efficient way to raise business capital to manage the day to day activities with ease.
Pros of MCA
- Convenient and quick access to fast cash
- Easy application and approval process
- No need of having or maintaining a perfect credit score
- Suitable for almost all types of businesses
Cons of MCA
- MCAs have higher fees when compared to conventional loan options
- Daily, weekly or monthly deductions of credit card receipts result in reduced cash flow
Why are Merchant Cash Advances Better?
Running a business is not a piece of cake, and at the time you need financial assistance to run the day to day operations. Whether your business is looking to raise business capital for purchasing a new equipment or bulking up your inventory, it is essential to first spend money if you want to make money. There are many financing options available in the market, of which MCAs are better than conventional and other alternative options.
There are several ways that different MCAs from other options – one of the biggest advantages is that the amount you borrow from the lender is automatically repaid through a fixed percentage of the credit card receipts you generate on a daily basis. Unlike business loans where you have to make monthly payments of a fixed amounts, MCAs are flexible where the lender will deduct a percentage of the sales receipts depending on how your business is performing. Thus, if some days you are not reaching your target sales, it is not important to make a fixed amount payment all times.