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Small businesses have a myriad of necessary financial expenditures to cover, including product inventory, employee salaries, and a location to conduct business. To fund your vision, you’ll need to secure financing, whether it comes in the form of crowdfunding, peer-to-peer lending, or credit-building small business loans.
Entrepreneurs can use these funds to start their new business, purchase an existing company, or expand their current enterprise.
If you’re a small business financing newbie, your list of questions might stretch miles long. Here are eight frequently asked questions about small business financing.
1. How Are Small Businesses Financed?
External debt, such as loans or credit cards, is the most common form of financing for small businesses. Small businesses may receive funds from outside equity, like angel investors, but this source is less common.
2. What Type of Financing Is Best for a Small Business?
Each small business is different, but usually, small businesses can significantly benefit by applying for a loan from a bank or online company. Equity funding can be tricky, especially if the business is just starting in the market.
3. Is a Line of Credit Necessary to Have a Small Business?
Small business financing can give new business owners peace of mind if money grows tight. While it is not necessary to have a line of credit, it can help to have some cushion as a method of insurance. It is better to be prepared rather than put yourself in a position to apply for a last-minute high-interest-rate loan.
4. What Are the Main Reasons Businesses Use Small Business Financing?
Small businesses may look into getting financed when opening a business or acquiring inventory. Once the small business starts thriving, small business owners can solicit funding to expand their company.
5. What Are SBA Loans?
Small Business Administration (SBA) loans are government-backed loans that help small businesses with funding. Benefits include a reduction of risks to the lender while expanding small business economic activity. Since the SBA loan is a bank loan, the application and loan payments will go through a bank. The small business owner will make the loan, and then SBA will repay up to 85% of the loss in case of default.
6. Is It Better to Start a Small Business with Equity or Debt Financing?
Debt financing is the best option for a small business startup that does not require large-scale funding. For a more prominent startup, owners may choose to use a combination of debt and equity financing to lessen the negative aspects of each type of loan.
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7. Are There Other Federal Government Programs for Small Businesses to Get Financed?
Small businesses can utilize a few federal government programs for financing. Grant.gov, for example, contains a database of options for small businesses to obtain grants. There are also industry-specific grants and grants for minority groups.
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8. Which Industries Are Eligible for Small Business Financing?
There are small business financing options for just about any company. However, small businesses promoting religion, selling sex-related products, or offering illegal activities are often ineligible for financing.
Just about any startup can benefit from small business financing. Most small businesses will benefit from obtaining funds from debt financing, such as a loan. There are also options to apply for government-backed loans and grants for various small business owners.
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