5 types of bank financing for startups
Learning to speak banker will help you get the money you need
By learning a bit about typical banking products offered to new small business owners, you'll be able to ask better questions, find the right solution for your particular needs, and feel less intimidated during a meeting with your banker because you'll be able to speak their language.
Here are the 5 main types of bank financing:
1. Term loan. Large amounts of well-placed capital can make a big difference to your ability to stay competitive. Used to purchase assets (like machinery, equipment, inventory) and provide working capital (paying office rent, salaries, supplies), a term loan is usually repaid over 1 to 10 years in monthly instalments.
2. Operating line of credit. A flexible option for businesses seeking short-term funding. A line of credit acts as a cushion to help you manage shortfalls or seize opportunities.
3. Business credit card. A credit card provides a form of short-term financing because you can charge business expenses to the card and pay later. Many cards can be used without incurring interest charge providing you pay the balance in full within a stated period of time (the payment grace period). Use it for smaller, day-to-day business expenses like office supplies.
4. Lease financing. Instead of buying equipment or vehicles, leasing is often preferable. Similar to a car lease, your business agrees to pay the bank a specific monthly amount.
5. Factoring. Large orders can squeeze cash flow because the owner must incur substantial expense to get the work done before collecting customer payment. The bank can finance your customer invoice by advancing a portion of the invoice amount, so you can get the job done. The bank collects the invoice total when the customer pays. Expect to pay 1% to 5% in fees.
It's always a good idea to present your financing need and ask the banker to suggest appropriate products. Don't feel you need to buy what they offer — take the information, and shop around with other banks.
Be prepared to back it up
Keep in mind that the bank may ask you to personally guarantee any credit granted to your new business. Once your business has two years of financial history, you can request to remove your personal guarantee because the business has enough operating history to generate its own credit rating.