What are the pros and cons of each way to finance an online business?

Sooner or later, almost every online seller runs into the same problem: money. Most online businesses need financing at some point to keep cash flowing, whether for day-to-day expenses or for expansion.

Loans and investors can make or break your business. Picking the right financing option can give you the money you need to grow your sales, hire more staff and build bigger, faster.

Financing a business is never “a one-size-fits-all” scenario. Different types of funding suit different types of business, and the wrong type of funding can end up causing more problems than it solves. Funding options vary in many ways - speed, approval rates and repayment terms, among others. How fast you need money or how often you may need funding can rule out or in one option over another. That’s where finding the right funding strategy comes in.

Comparing funding options and terms can be overwhelming, but buying smart is essential to your future. Complications lead to bad decisions, or even none at all. Find out what you need to know to make the right financing decisions for your small business.

Financing Terminology

Before you start comparing financing options, understanding financing terminology is crucial. Without knowing what lenders are talking about, you could easily sign a bad deal without realizing it. The more you understand the differences, the more sense the pros and cons will make.

Debt is money owed or due to someone else.

ROI is short for “return on investment,” and it compares the money you gain or lose compared to the money you put in. Generally, a high ROI means a big return on a small investment.

Collateral is an asset like a car or a house that you already own. A loan might require you to give up collateral if you can’t repay.

The level of risk describes the chances that a business can’t repay a loan or that the real return differs from the one expected.

Any funding provider is going to judge your chances of repaying the money they’re considering lending you. To do that, they’ll use a credit score. Credit scores are built from your credit history. Your score is how trustworthy they see you as to repay them.

To get your score, a lender does what’s called a pull on your credit history. If they do what’s called a soft pull, it doesn’t affect your score. Doing a hard pull typically lowers it by about two points each time, so it’s best to ask which kind a funder uses.

FICO scores use the data from Experian, TransUnion, Equifax to decide how likely it is that a person will pay back money he or she borrows. FICO scores run from 350 to 900.

Just remember: FICO scores show the credit history of a person, not a business.

Tillful offers a free business credit score in minutes, updated daily, with tips on how to raise it. If your score is good enough, it can pre-approve you for financing from its partners.

”Unsecured funding” is just what it sounds like: the funder approves the money on your creditworthiness, not on any collateral you put up.

Secured funding, however, is backed by collateral the funder takes if you default.

Equity is the assets you own that can carry debts or obligations.

You might think of underwriting as figuring out how risky it is to loan money to you. That’s how funders decide whether to approve or reject your application.

A funder will buy your future sales at a discount in a purchase of future receivables.

A factor rate is the multiplier you use to figure out your total repayment. For example, if you borrowed $10,000 and had a 1.3 factor rate, you would need to pay back the original $10,000 plus an extra $3,000, for a total of $13,000.

Interest is something that gets piled on for the amount borrowed. If you borrow $10,000 at 2% interest, you’ll owe $200 in interest, making a total of $10,200.

An APR tells you how much yearly interest you pay on a loan. For a loan that’s on an amortization schedule, it’s a useful and simple tool. Unfortunately, an APR is misleading for short-term funding.

Rebates, or refunds, can come from overpaying or as a discount for paying off early.

Fees are what you pay funders for financing.

Working capital is the money you use to cover short-term business costs like inventory, payroll and more.

A cash advance gives you upfront cash for future sales at a discounted rate. It’s not a loan, because the funder buys part of your sales outright.

Finally, innovations in FinTech, also known as financial technology, are improving and automating financial services across the financial world.

Compare Different Sources of Funding

Here are a few areas to keep in mind when you compare different sources of funding:

• Will the advance or loan cover your costs?
• Does it mean taking on more debt?
• Are you sure you can meet the minimum criteria for approval?
• Does your credit score make you a good fit for approval?
• What will the timing of the funding’s arrival and payments be?
• How much will this financing option cost you per year?
• How long do you have to pay it back?
• Do you have to put your home or car up as collateral, and will doing that tangle your personal and business finances?

Based on what your priorities are, some criteria will mean more to your business than others. No single option is right for everyone.

Type of Business Funding

Personal loans are one type of financing you can get. They’re borrowed from a bank, credit union or online lender, and they’re paid back in fixed monthly installments over several years. Rates are usually lower than credit cards, and the loans can be secured or unsecured. Your personal credit score is usually what the lender looks at to decide on approval.

For startups or companies with no sales history, a personal loan can be a good fit.

As long as your credit rating is high, there are usually low rates and fixed monthly payments.

There are downsides, though. To qualify, you often need a FICO score of at least 530 to qualify and one of 670 or above for the best rates. You may also have to sign a personal guarantee or put up collateral, like a car.

Lendvious is a consumer marketplace lender with various consumer financing options.

You might also think about Prosper.

You can also consider Upgrade.

And check out OneMain.

SBA loans are loans guaranteed by the Small Business Administration. They have several programs for different business needs, like 504 loans for commercial real estate or general business loans called 7(a). The SBA doesn’t loan money directly. Partner lenders make the loans under SBA rules, and its guarantee lowers the lender’s risk.

For established businesses with solid cash flow and great credit scores, SBA loans can be the best option for financing.

The benefits can be low costs, long terms and large amounts, going from $500 to $5.5 million.

On the other hand, SBA loans can be hard to get approved for and are often secured with collateral. A life insurance policy naming the lender as beneficiary may be required.

Wells Fargo and Chase are worth looking at.

You might check out SmartBiz.

Fundera is worth a look.

You can try Celtic.

And Newtek.

Bank loans are just like personal loans but from banks. They set the amount they’ll lend and the interest rate you pay based on your credit score, banking history and income. Typically, they’re paid back monthly over 3 to 10 years.

For large, well-established firms with strong cash histories, bank loans can be a good option.

They usually come with low interest rates and long terms.

However, online businesses are usually turned down, and bank underwriting can be slow and outdated. You may need to be in business for two years and give tax histories. The loans may also need securing with collateral.

When you’re shopping around, starting out with the bank you already use may be smart. Banks often want you to have deposits with them before they’ll consider a loan.

A cash advance for your business is when a funder buys the rights to your future sales. It’s not a loan, and it’s not considered debt. A third-party funder will buy your future receivables at a discount based on your business’s general health, not your personal credit rating or collateral. The advance is repaid as a flat fee that gets taken out of sales as they come in.

Merchant cash advances, or MCAs, can be a good option when you need quick financing or can’t get a traditional loan. For businesses that can earn a big return on their money, getting a cash advance can maximize results.

Of course, keep in mind that cash advances have to be repaid quickly, typically within three to 12 months, with daily or weekly withdrawals from a bank or processing account.

Cash advances are fast to apply for, and decisions come quickly. Cash advances usually don’t come with a credit check, and they also usually aren’t secured. And most online sellers get approved. Another reason to consider an advance is that you don’t pay it back with fixed monthly payments. Instead, you pay a share of sales, so slower months mean smaller payments.

Where cash advances can fall short is that they’re short-term. The costs may also be higher than for traditional loans. That can squeeze your cash flow.

Reliant Funding is one place to start.

Check out GetBackd.

And try Rapid Finance.

One option that doesn’t fit cleanly into any one financing strategy is equipment financing. It’s a loan just for buying a specific piece of equipment, like a forklift or a vehicle.

It suits any business that wants to buy a specific piece of equipment or machinery.

Some benefits are the ability to get low rates, fast approval without a personal credit check and long terms.

Be aware, though, that the loan is tied to the equipment itself, so it becomes the collateral for the loan. The downside is that, if you can’t pay it back, you may lose the equipment.

For low-risk borrowers with high credit, Alliance Funding is worth looking at.

For medium to higher risk borrowers with lower credit, check out NSF.

There’s Currency to consider, too.

Balboa is also worth looking into.

A line of credit is a flexible loan. You can use up to a set maximum and draw from it whenever you want. You can also spend and pay back and borrow again as often as you like, as long as you stay within the limit and make timely payments.

That makes a line of credit a good option for businesses wanting backup funding for unexpected costs.

A line of credit may be cheaper than a cash advance. They also don’t need you to borrow the full amount, and you only pay interest on the money you do borrow.

One potential downside is that they often require high credit ratings and may have higher rates if they’re not backed by collateral.

BlueVine is one option to start with.

You might also try American Express.

Headway is another to check out.

And there’s Idea Financial.

A home equity loan is a loan that uses your home as collateral. You get a fixed amount that you repay in monthly installments over a fixed term. Lenders usually cap it at 85% of your equity, based on your income, credit history and home value.

It’s a good idea if you own the home, already have a lot of equity and want a low-rate loan.

It is cheaper than using unsecured lines of credit. It is usually easy to get.

Keep in mind, though, that you’re borrowing against your own home, which means you risk losing it if you can’t repay.

A good next step is to talk with your mortgage provider about a home equity loan.

Many businesses use business credit cards for general expenses and some inventory. The cards allow you to earn reward points and cash back on operating costs to reinvest.

They’re good for small, daily purchases that businesses can pay off every month.

Many cards can even include rewards to help with marketing.

Cons: the limits are often low, and a maxed-out card means you can’t buy inventory when you need it.

Capital One can be a good option.

Chase for Business might suit you.

Check out Divvy, too.

Venture capital or VC is private investors putting money into startups or small companies with good potential for big, long-term growth. Venture capital firms usually give a lot of money but also expect you to give away equity and make big, fast returns. That often puts a lot of pressure on funded startups to hit difficult targets.

An angel investor, on the other hand, is usually a wealthy individual - sometimes friends or family - giving smaller sums along with mentorship.

This funding source suits rapid-growth, direct-to-consumer businesses that can’t get traditional capital. In this model, the startup is the next Casper or Allbirds.

Some benefits are large funding for startups, mentorship, expertise and connections.

On the other hand, you’re giving up equity, and you’ll lose control over company decisions. And investor return expectations can be unrealistic.

New York Angels is a well-known group to start with.

Lightspeed Venture Partners might suit your needs.

Lerer Hippeau is another one to look at.

And Bullish is also a group to consider.

POS financing is a type of business funding that works by a point-of-sale vendor offering cash advances or loans to their merchants. Approval can depend on the sales and transaction histories of those merchants in the platform. Repayments can be calculated as a percentage of your daily card sales.

It suits restaurants, brick-and-mortar shops or any businesses with high volume on a given POS.

Some of the upside is that it can be fast and easy to get and even be offered pre-qualified loans.

Of course, the downside can be higher costs and daily repayments that come out of your account automatically.

Square Capital is a good one to try.

You might look at Clover, too.

And there’s Toast.

Each funding option comes with its own pros and cons, and matching one to your business should be a calculated choice. Choosing the wrong option can slow or even stop your business. Ultimately, choosing your funding depends on your specific needs, goals and financial situation.