July 31, 2020
Strategies To Finance Your Business

Emily LaDrig

This blog originally appeared on MorganStanley.com and is being used with permission as part of their partnership with Excelerate America. 

 

Growth could be within your grasp—if you can get the right financing.

Whether your business is brand new or has been established for decades, you may be at a point where you need financing in order to grow. Perhaps your established medical practice is ready to add cutting-edge imaging machines. Or your boutique needs to double its inventory of an in-demand handbag to increase profits. Maybe your company is outgrowing its office space, needs to hire more employees, or is considering an acquisition. In any case, growth could be within your grasp—if you can get the right financing.

Securing Financing Can Be Difficult

Entrepreneurs often need to get creative in order to access the capital they need to grow their business. Typical financing options include personal or business credit cards, borrowing against securities portfolios, and taking out commercial loans. Each of these options carries pros and cons, some of which we'll discuss below: 

Option: Tapping unsecured credit, such as credit cards

Credit cards are a popular source of funding for small businesses.  According to the National Small Business Association, a 2017 report found that 31 percent of small business owners used a credit card in the past year to access capital1. 

Pros:

  • Once approved for the card, most purchases can be made quickly without any paperwork.
  • Opening a credit card can help establish a credit record for your business, making it easier to obtain financing in the future.

Cons:

  • The main downside is cost. Although business credit cards tend to charge lower rates than consumer cards, the interest rate can still be in the double digits2.

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Option: Take out a commercial loan

A business loan or line of credit from a bank, credit union or online funder is another common way to secure financing.

Pros: 

  • A commercial loan is familiar to entrepreneurs and may be widely available.
  • Usually carries lower interest rates than some other financing options, such as credit cards. Also, the interest payments may be tax deductible.
  • Taking a commercial loan can help establish a credit record for your business, making it easier to obtain financing in the future.

Cons:

  • Paperwork for a bank loan can be burdensome, especially for a smaller business.  You may have to provide regular reports to the lender on specific items such as receivables or even the creditworthiness of customers.
  • You may also have to prove that the business—or the business owners—have adequate collateral, which may involve getting appraisals for company real estate, equipment or inventory.
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Option: Borrow against your portfolio

A securities based loan, or SBL, uses eligible securities in a brokerage account as collateral for a loan or line of credit.

Pros:

  • If you qualify for an SBL, you may potentially benefit from lower costs compared to other borrowing options.
  • Credit decisions may be approved within just a few days with relatively little paperwork, which can be beneficial when a business needs a quick response.
  • Another advantage if you own a newer business is that you often don’t need inventory to obtain an SBL since they are secured by a stock portfolio.

Cons:

  • There are risks associated with a securities based loan, including the potential for having to replenish or repay your loan if the value of the securities pledged as collateral drops.

With the complexities businesses face in acquiring needed capital, it makes sense for business owners to consider all sources of financing before deciding where to apply and to review all the pros and cons before applying for any type of loan.

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1National Small Business Association 2017 Year-End Economic Report https://nsba.biz/wp-content/uploads/2018/02/Year-End-Economic-Report-2017.pdf

2CreditCards.com Credit Card Interest Rates Chart. https://www.creditcards.com/credit-card-news/historic-credit-card-interest-rate-chart.php

     

    

 

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