Obtaining resources for your business involves deciding which is the best financing option, according to the characteristics of your company and the objectives you have in mind, whether overcoming an unforeseen event or growing.

Historically, small and medium-sized companies have faced a shortage of financing options; this is because large banks and financial services companies have focused their efforts on transnationals and large corporations, leaving the SME sector largely neglected.

That is why we decided to create content with viable and, in our opinion, the most convenient financing options for small and medium-sized companies.

Business financing options

Not all companies need the same financial products. The different types of loans for companies and SMEs cover different needs and must be evaluated before contracting them, depending on the stage they are in or the use they want to give to the money.

Some of the most common types of business loans (or ways to acquire capital for the business) are working capital credit, bank credit, financial factoring, crowdfunding, government programs, incubators and accelerators, etc.

Let's discuss the details of each one:

1- Working capital credit

This option focuses on providing resources to companies to continue their operations, resolve their payments to suppliers, and other immediate commitments, such as payroll payments.

• This financing option allows companies to continue their operations and provides them with financial health.
• It allows you to face all types of situations related to working capital. This represents flexibility, whereas traditional bank loans are usually designed to cover specific aspects (such as payroll or payment to suppliers and nothing else).
  
• It may have lower rates than a bank loan. This is why it represents a lower risk of debt.
• It is useful for both micro, small, and medium-sized companies, as well as large corporations. In fact, this type of credit prevails in all sectors because companies require resources to respond to the economic imbalances caused by the emergency situations.

2- Bank credit

Bank credit is the “traditional” way of obtaining resources. It is available mainly to clients of a banking entity, so sometimes, the application can be complicated if you are not already a client of the institution.

• This type of credit is offered to individuals or legal entities, and the conditions vary depending on the bank, amount, credit history, and payment term.
• If the resources will be used in your company or business, it is essential that you request a bank loan in the form of a business loan. When you request personal loans for this purpose, you obtain higher rates, interest, and payments that may not be deductible for your business, among other unfavorable conditions that usually put finances at risk.
• This type of credit is useful for SMEs and companies since there are products dedicated to each one. Even so, it is common for them to have restrictions on the use of resources (so working capital credit is usually more flexible).
• In general, it is recommended for medium and long-term projects that have been properly analyzed so that they do not represent too high risk in terms of paying interest and additional commissions.
• Banks do NOT usually have an “agile” application and approval process, so this type of financing involves a longer waiting time for approval.
• To receive a bank loan, it is necessary to cover a much longer list of requirements, including financial statements and tax returns, among others, that few small and medium-sized companies can cover.

This type of financing is convenient for those SMEs that are already clients of a banking institution and that have all their documentation and administrative processes up to date.

3- Financial factoring

Financial factoring is one of the business financing options with the most growth in recent years. It consists of advancing the payment of accounts receivable (invoices) of the business, which allows capital to be available quickly.

Its main characteristic is that it reduces the risk of debt significantly since the resources belong entirely to the company and will be covered as soon as the payments already scheduled from clients are received.

• This is undoubtedly the most recommended financing option for SMEs, as it offers very competitive rates.
• Another important advantage is that it does not represent indebtedness since only the resources that already belong to the company are being made available in advance.
• The use of resources is also very flexible, although it usually focuses on operational payments, purchases of inputs, machinery, suppliers, and so on. For corporations, it is especially useful to have a financing option in their payments to suppliers.
• It helps to have resources quickly (in periods of 24 to 48 hours on average), so it works for emergencies and unforeseen events.
• Perhaps the only disadvantage of this financing option is that it is not useful for those companies that do not have pending invoices or payments from clients since these invoices and/or payments function as collateral for the business loan.

4- Crowdfunding

Crowdfunding refers to the practice of raising funds from a large number of individuals or investors, typically through online platforms, to support the growth, development, or launch of a small or medium-sized business. It is a financing method that has gained popularity in recent years as an alternative to traditional sources of funding such as bank loans, venture capital, or angel investors.

• It is recommended to new companies that will give life to an innovative project. Some businesses that have stood out in this type of financing are video games, music players, and even clothing with special characteristics.
• It is not guaranteed financing or quick to obtain: the campaigns last a few weeks or months, and the public’s response will depend in part on the proposal but, above all, on whether it goes viral.

5- Government programs

They exist in different areas. They may be focused on micro-businesses and one-person projects in SMEs, especially when carrying out import and export operations.

• These programs are subject to various secretariats and institutions at the local, state, or federal level, so you have to be aware of the calls.
• They are recommended for newly established businesses because this characteristic is usually a requirement in the calls. Furthermore, the amounts are usually low (between $10,000 and $30,000), so they are not useful for companies with larger operations.
• This is ideal financing for medium or long-term projects; it should not be considered an emergency option since the calls and response times are highly variable.

6- Incubators and accelerators

Incubators are organizations that provide capital, advice, and other facilities to emerging companies. Accelerators, for their part, offer specialized advice and development plans so that emerging companies (that have already passed their initial stage) reach a new stage of growth.

• Both options are best for technology and innovation companies.
• They are dedicated to high-risk and high-potential profit sectors. It is estimated that accelerators accept less than 3% of applicants.

7- Venture capital funds

These types of funds are available for emerging companies with a high level of risk and high potential.

• It is necessary to have a solid and ambitious business plan.
• It is more common in the applied sciences and information technology sector. Twitter is one of the companies that benefited from venture capital to grow.

8- Business angels or private investors

Private investors work in a similar way to venture capital, but they are people who give their private capital to emerging companies.

• Typically, support is provided in exchange for shares in the founding or growing company.
• Since these are private investors, the business plan is approved according to their particular criteria, always with a view to a high return on investment.

9- Bartering or exchange of services

Financial bartering or bartering is the exchange of products or services between two companies; for example, between a magazine that gets paper in exchange for putting an advertisement for the trash can on the back cover.

• It can occur directly or through platforms where various businesses come into contact.
• It is necessary to spend a lot of time searching for the right company, given that it is a relatively little-used option.

10- Personal loans and loans between individuals

Personal loans are a type of financing granted by banks and financial institutions to a specific individual.

• It is only recommended for businesses with a sole owner or independent professionals where the profits and, therefore, the payment responsibility are always for the same person.
• The applicant receives an amount and credit conditions that depend on their personal credit history, so the amounts are not usually very high. In addition, the interest rates are usually higher because the risk is generally greater.
• It is very important to consider that the owner of said Loan assumes sole legal responsibility for the debt and payment commitment.
• If the business consists of several partners, it is recommended NOT to use this type of financing since the payment responsibility falls only on the applicant, something that can lead to future problems.

Loans between individuals, on the other hand, are provided by family, friends, or acquaintances, usually without taking into account the conditions of the company.

• Given their nature, these will be loans in moderate amounts, which may not be enough for a business.
• They depend on trust and personal relationships, so it is necessary to use them as a last resort and only if there is certainty that the commitment can be fulfilled.
• Most microenterprises resort to this type of financing as a regular way to obtain resources, but we always suggest that you do everything possible to take options in the form of “Loan or business credit, “ this will help your business generate its own credit history, and The payment responsibility is shared between the partners.

As we’ve discussed in this article, choosing the right financing solution is crucial for your company’s growth. Don’t miss out on the opportunity to make informed decisions. Reach out to Financely today and take the first step towards securing the financial future your business deserves. Our team is ready to provide the guidance you need. Contact us now and unlock the potential of your business with confidence.