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Illinois has about 1.3 million small businesses that collectively employ 2.4 million people — more than 44% of the state’s private workforce. To help small businesses flourish in Illinois, the state offers a number of generous small business grants that can help entrepreneurs launch or grow their companies in the Prairie State. Unlike small business loans, grants typically don’t have to be repaid. While competition for Illinois grants can be stiff, here are five small business grants in Illinois you may want to explore.

Grants for Small Businesses in Illinois

If you’re looking for a small business grant to grow or start your business in Illinois, here are some options to consider.

Illinois Tourism Attraction Grant Program

•  Program description:The Illinois Department of Commerce and Economic Opportunity (DCEO) awards grants to for-profit businesses, nonprofit organizations, and other entities that develop and enhance Illinois tourism attractions.

•  Incentive: Businesses can receive matching grants ranging from $15.000 to $500,000 to help boost tourism in Illinois.

•  General requirements:

◦  Have a valid federal Employer Identification Number (EIN)

◦  Propose a viable project that promotes sustainable economic growth and tourism in Illinois

◦  Have a current System for Award Management (SAM) registration

◦  Have a valid Unique Entity Identifier (UEI) number

◦  Be in good standing with the Illinois Secretary of State, as applicable

◦  Not listed on the Federal Excluded Parties List

◦  Not listed on the Illinois Stop Payment list

◦  Not listed on the Illinois Department of Healthcare and Family Services Provider Sanctions list

•  How to apply: Contact the DCEO if you’re interested in the Illinois Tourism Attraction Grant.

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Illinois Reproductive Health Facilities Capital Grant Program

•  Program description: Illinois offers matching grants to nonprofit and for-profit clinics providing or planning to provide pregnancy-related services in a clinical setting.

•  strong>Incentive: Receive grant awards ranging from $50,000 to $500,000 to help cover capital improvement expenses toward security enhancements or facility upgrades.

•  General requirements:

◦  Have employees, volunteers, or agents who are licensed healthcare professionals

◦  Provide or plan to provide abortion care as defined in the Illinois Reproductive Health Act, as well as one or more of the following pregnancy-related services:

■  Contraception and contraceptive counseling

■  Pregnancy testing

■  Pregnancy diagnosis

■  Pregnancy options counseling

■  Limited obstetric ultrasound

■  Obstetric ultrasound

■  Obstetric sonogram

■  Sexually transmitted infections testing

■  Prenatal care

◦  Have a valid federal EIN

◦  Have a current SAM registration

◦  Have a valid UEI number

◦  Be in good standing with the Illinois Secretary of State, as applicable

◦  Not listed on the Federal Excluded Parties List

◦  Not listed on the Illinois Stop Payment list

◦  Not listed on the Illinois Department of Healthcare and Family Services Provider Sanctions list

•  How to apply: You can access the Illinois Reproductive Health Facilities Capital Grant application on the DCEO website.

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Illinois Federal Grant Support Program

•  Program description: Illinois offers state-based financial assistance to eligible small businesses in Illinois that have also received federal grant awards.

•  Incentive: Receive state-based matching grants ranging from $10,000 to $2 million if you’ve also been approved for specific federal grant awards.

•  General requirements:

◦  Be an Illinois-based organization or business

◦  Be the primary applicant on a federal award application

◦  Have a project proposal where at least 51% of the total project activities occur in Illinois

◦  Have a valid federal EIN

◦  Have a current SAM registration

◦  Have a valid UEI number

◦  Be in good standing with the Illinois Secretary of State, as applicable

◦  Not listed on the Federal Excluded Parties List

◦  Not listed on the Illinois Stop Payment list

◦  Not listed on the Illinois Department of Healthcare and Family Services Provider Sanctions list

◦  Project must be eligible for a specified federal grant program

◦  You agree to provide matching funds toward the project

◦  Applicants for federal Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs are ineligible for this grant but may be eligible for the DCEO’s separate Phase I SBIR/STTR Matching Grant Program

•  How to apply: You can access the Illinois Federal Grant Support Program application on the DCEO website.

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Chicago Small Business Improvement Fund (SBIF) Grants

•  Program description: Chicago SBIF grants can reimburse small business owners for some of the cost of renovating, remodeling, or improving the appearance and viability of eligible commercial properties in the Windy City.

•  Incentive: Receive up to $150,000 in reimbursements for making improvements to eligible commercial properties and up to $250,000 for enhancing eligible industrial properties in Chicago.

•  General requirements:

◦  Be the owner or tenant of an eligible Chicago business property located in a Tax Increment Financing (TIF) district where SBIF funds are available

◦  Have gross annual sales not exceeding $9 million on average over the previous three years if you’re a small business owner
Have a net worth not exceeding $9 million and liquid assets up to $500,000 if you’re a commercial property owner

◦  Have no more than 200 full-time employees if you’re an industrial business owner

◦  Make permanent building improvements to eligible commercial or industrial property in Chicago

◦  Operate an eligible business that’s not one of the following ineligible businesses:

■  Chain and franchise businesses

■  Branch banks

■  Day labor employment agencies

■  Currency exchanges, payday loan operations, or title secured loan stores

■  Pawn shops

■  Fortune telling services

■  Liquor stores and nightclubs

■  Adult uses

■  Track waging facilities

■  K–12 schools

■  Gas stations

■  Firearms dealers

■  Places of worship

■  Smoke shops and cigar lounges

■  Tobacco dealers, including sales of tobacco, nicotine, or similar products and accessories

■  Residential storage warehouses

■  Trailer-storage yards, junk yards, and similar uses

•  How to apply: Access the grant application online through SomerCor 504 Inc., the nonprofit that administers Chicago’s SBIF Grant Program. You can email your completed application to SomerCor.

Illinois State Trade and Export Promotion (ISTEP) Grants

•  Program description: ISTEP is a grant reimbursement program that can help you export your goods and services from Illinois to foreign markets.

•  Incentive: Receive up to $10,000 in reimbursements for eligible business expenses, including website translation and international trade show participation costs.

•  General requirements:

◦  Be an Illinois firm with headquarters or a substantial facility based within Illinois

◦  Be an active small business in existence for at least 12 months

◦  Be profitable with gross annual revenue of at least $250,000

◦  Have products or services that contain at least 51% U.S. and 25% Illinois content or that substantially contribute to Illinois job creation

•  How to apply: Access the ISTEP grant application and web submission form on the DCEO website. Companies applying for or receiving any other local, state, or federal grant funds associated with export promotion generally are not eligible for this grant.

Who Provides Small Business Grants in Illinois?

Local and state government agencies, including the state Department of Commerce and Economic Opportunity and the Illinois Department of Natural Resources, offer a variety of small business grants in Illinois.

Do You Have to Pay Back a Small Business Grant?

Typically, no. Unlike small business loans, small business grants generally do not need to be paid back. However, that doesn’t mean there are no strings attached. Small business grants usually come with terms and conditions and require the recipient to sign a funding agreement. If for any reason you violate the terms of the grant, you may be responsible for paying back the funds.

In some cases, small business grants may require you to spend the money by a certain date. You may also have to provide proof of payment and a written statement detailing how you’ve spent the grant.

Who Is Eligible for Small Business Grants in Illinois?

Local business owners or operators of an enterprise with fewer than 500 employees may be eligible for small business grants in Illinois.

The U.S. Small Business Administration’s Office of Advocacy generally defines a small business as an independent business having fewer than 500 employees. A business with just a few employees, even self-employed individuals, may also be eligible for small business grants.

What Industries Does Illinois Support With Grants?

Illinois offers grants supporting a variety of industries, including:

•  Manufacturing

•  Reproductive health clinics

•  Retail trade (store and nonstore retailers)

•  Tourism

Illinois Resources for SMB Owners Looking for Funding

Here are some resources for small and medium-sized businesses looking for funding in the Prairie State.

Illinois Small Business Development Centers (SBDC)

Illinois Small Business Development Centers (SBDC) are located throughout the state and provide resources for startups and existing small businesses, including:

•  Business training seminars and webinars

•  Marketing research

•  One-on-one business advice and management assistance

SBA District Office in Illinois

The U.S. Small Business Administration (SBA) is a federal agency that provides resources and support to small business owners. The SBA Illinois District Office serves the entire Prairie State with a main office in Chicago and satellite office in Springfield.

Alternative Funding Sources for Small Businesses in Illinois

If you don’t qualify for small business grants in Illinois, you’re not necessarily out of funding options. Here are some other ways you may be able to get the capital you need to launch or grow your business in Illinois.

Illinois Microloan Lenders

Community-based nonprofits may offer microloans of anywhere from $500 to $50,000 to underserved small business owners in New York, such as women and minorities. Interest rates tend to be low (even zero in some cases), and the qualification criteria are often less stringent compared with other business loans.

Microloans can provide an infusion of cash to get a startup off the ground or grow an existing business. However, you may need to provide a microlender with a personal guarantee and collateral in order to secure funding.

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Illinois SMB Term Loans from Private Lenders

Banks, credit unions, and other private lenders may offer business term loans to Illinois business owners. With a term loan, you receive a lump sum of cash up front and repay it over a set period of time, often up to 10 years.

Banks typically require applicants to have at least two years of business history and strong financials, while online alternative lenders generally have more flexible qualification requirements (rates, however, tend to be higher).

Recommended: What You Should Know About Short-Term Business Loans

SBA loans for New York Businesses

An SBA loan is a type of SMB loan that is partially guaranteed by the U.S. Small Business Administration and offered by banks and other lenders. Loan amounts range from $500 to $5.5 million.

With an SBA loan, the federal government guarantees to repay most of the loan amount if a borrower defaults. This reduces risk to the lender and encourages them to offer loans to companies they might not otherwise work with. For small business owners who can’t qualify for a traditional business loan, an SBA loan can be a good option.

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Business Lines of Credit

A business line of credit is a flexible small business financing option that allows you to borrow money on an as-needed basis up to a predetermined amount. Similar to a credit card, you pay interest only on the money you’ve drawn. Once you’ve repaid your funds, you can draw on your line again.

Business credit lines are offered by banks, credit unions, and online lenders.

Equipment Loans

If your business needs money to purchase equipment or machinery, equipment financing may be a good option. The equipment you purchase serves as collateral for the loan. Since this lowers risk for the lender, equipment financing often comes with competitive interest rates. Many banks and online lenders will offer financing that covers the full cost of equipment.

The Takeaway

Small businesses in Illinois have a range of options when it comes to grants, whether it’s from a state or local government or private source.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

How do you get a small business grant in Illinois?

To find a small business grant in Illinois, you might start by contacting the state’s Economic Development Administration and your local Small Business Development Center. You typically need to submit a grant application as a qualified small business owner to be considered for a small business grant in Illinois.

How hard is it to get a business loan in Illinois?

You typically need to have been in business for at least two years and have strong financials to qualify for a business loan from a bank. Online alternative lenders tend to have more flexible qualification criteria but generally charge higher interest rates.

What is the easiest SBA loan to get approved for?

There’s no guarantee you’ll get approved for any SBA loan, but SBA microloans may be one of the easier ones to get if you’re a new business owner. Startups may be eligible for SBA microloans of up to $50,000. If you’re looking for a streamlined application process, you may want to look into an SBA Express loan.

Photo credit: iStock/AsiaVision

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOSB0424069

If you feel like your company’s growth has stagnated, it may be time to look at inorganic growth strategies. Inorganic growth involves expanding through mergers and acquisitions rather than increasing your company’s current activities. It’s generally considered faster than organic growth but requires a larger upfront investment and comes with some risk.

Read on for a closer look at inorganic growth, including its pros and cons, how it compares to organic growth, along with strategies for achieving (and funding) inorganic growth.

What Is Inorganic Growth?

Inorganic growth is growth that is created using resources outside of the company. It typically involves mergers and acquisitions, joint ventures, or adding locations. This is in contrast to organic growth, which occurs through harnessing a company’s existing resources.

While organic growth tends to be slow and gradual, inorganic growth enables a company to expand rapidly by entering a new market that may be related to or different to its original business line. Inorganic growth typically involves a more dramatic shift in how a business operates and requires a larger upfront investment than organic growth. Owners will often use small business loans to fund inorganic growth.

5 Inorganic Growth Strategies

There are several inorganic growth business strategies to consider, depending on how your business is set up and how willing you are to give up your company’s independence.

1. Acquisition

Purchasing an already-established business is one way to instantly increase your business’s revenues and profits. An acquisition allows you to take over a proven business model with customers and systems already in place rather than having to build it from scratch.

2. Merger

In a merger, two firms agree to become partners in a larger business. To achieve inorganic growth through a merger, you might join forces with a competitor. This takes your competition out of the marketplace and allows you to absorb its market share. It also gives you access to its technology, products, and workforce.

3. New Location

Opening a new location for your existing business leverages the hard work you’ve already put into your brand. You won’t have to develop new management or marketing strategies, other than extending what you’re already doing at your original location. If you sell products, you may be able to negotiate a lower per-unit cost if you need to increase the size of your orders from suppliers to outfit a new location.

4. Strategic Alliance

When two brands see benefits in working together but don’t want to give up their individual independence by merging, you have a strategic alliance. Perhaps Company A has the audience that the other wants to reach, while Company B has technology that Company A can leverage.

5. Joint Venture

Similar to a strategic alliance, a joint venture involves two or more companies coming together to take on a particular business activity for a limited period of time. A joint venture creates a new business entity that is separate from the participating businesses. This allows the participating businesses to grow while maintaining their independence and individual brands.

Recommended: How to Grow a Business

Pros and Cons of Inorganic Growth

To help you decide if an inorganic growth strategy is the right fit for you, here’s a look at some of the benefits and drawbacks of inorganic growth.

Pros

Unlike organic growth, which can take time, inorganic growth results in rapid expansion, since the company you are acquiring or partnering with already has established systems, customers, and revenues.

Growing through mergers and acquisitions also gives your business access to valuable resources and assets, such as technology, intellectual property, equipment, and staff. In addition, it can expand your market share and reduce competition. Becoming a larger company can also make it easier to access capital through business loans when you need it.

Cons

Inorganic growth generally requires a large upfront investment, which may involve taking on debt. If your company is currently small, getting the financing you need might require collateral, which can put personal or business assets at risk.

Acquiring a new business or adding a new location can also result in management challenges. In the case of a merger or acquisition, you may end up with multiple people in the same roles and need to consolidate. Merging with another company can also lead to friction.

While inorganic growth can result in rapid growth, success is not guaranteed. Investing in another business or location can be risky.

Inorganic Growth vs Organic Growth

Both inorganic and organic growth serve the same purpose — taking your business to the next level. But each takes a very different path to get there.

Inorganic growth involves using resources outside of the company, such as engaging in mergers and acquisitions. Organic growth, on the other hand, uses inside opportunities — such as cost-cutting measures, internal research and development, and operational improvements — to spur growth.

Another key difference: Inorganic growth typically requires a large initial investment, whereas organic growth generally involves gradually investing in marketing, human resources, and operations over time. As a result, inorganic growth usually requires taking out a business loan, whereas organic growth may or may not require financing.

Inorganic vs. organic growth also comes down to speed. Inorganic growth generally leads to a much faster increase in revenues and profits than organic growth.

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Funding Inorganic Growth

Here’s a look at some ways your business may be able come up with capital it needs to fund inorganic growth.

Business Loans

There are many different types of small business loans, including business acquisition loans. If you have good credit, you may qualify for a bank loan with low interest rates and favorable terms. If your business is new or you have fair credit, you may be able to get financing for inorganic growth through an online lender. These alternative lenders often have more flexible qualification criteria than banks, and also provide faster funding. However, loan amounts may be smaller and interest rates can be higher.

Equity Fundraising

Another option for funding inorganic growth is to bring on private equity investors. These individuals (or firms) can provide capital for you to acquire, merge with, or partner with another business, in exchange for equity in the company. Keep in mind, though, that investors may want a say in strategic decisions.

Invoice Financing

If you are looking for a smaller amount of financing to help fund a joint venture or strategic alliance, you might consider invoice financing. This allows you to leverage the value of unpaid invoices to get access to cash quickly. With invoice financing, lenders advance a percentage of your unpaid invoice amount (often as much as 90%). When your customer pays the invoice, you repay the lender the advance amount, plus fees.

Because invoice financing is backed by your invoices, it can be easier to qualify for compared to other types of business loans. However, invoice finance tends to cost more than other types of financing.

The Takeaway

Inorganic growth involves buying or joining forces with other businesses or opening new locations. It contrasts with organic growth, which is growth from within the company. Both inorganic and organic growth may involve outside financing. However, inorganic growth generally requires significantly more capital than organic growth.

If you’re looking for a loan to fund either type of growth strategy, a business loan could help.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

What is the difference between organic growth and inorganic growth?

Organic growth happens over time and involves using internal resources to increase revenues and customers. Inorganic growth, on the other hand, happens quickly and typically involves acquiring, merging with, or partnering with another company.

What is a benefit of inorganic growth?

Inorganic growth enables your business to expand rapidly, since the company you acquire or partner with typically already has established systems, customers, and revenues.

What are the methods of inorganic growth?

Inorganic growth strategies include: acquisitions, mergers, opening a new location, joint ventures, and strategic alliances.

Photo credit: iStock/filadendron

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSB0424070

When you’re looking for small business loans and financing solutions, maybe to get through a slow period or perhaps to grow your company, it’s a good idea to explore all your options.

In addition to loans, lines of credit, and other financial tools, credit card funding is an option to consider. It’s easy to access, it can be used in many situations, and it can have some pretty great perks, but there are downsides, too, as well as alternatives. Credit card funding for startups can work. But it pays to know all the facts before you make a decision.

What Does Credit Card Financing Mean?

Credit card financing simply refers to using credit cards to make purchases for your business.

Unlike term loans, such as a small business loan, where you get a fixed amount of cash all at once and then pay it back over a fixed period of time, credit card funding works more like a line of credit. You have access to a certain amount of credit and can make a purchase, pay it back, and then have access to the full line of credit again.

Credit cards do tend to have high interest rates. But if you pay off your purchases before the close of a billing period, you won’t rack up any interest. Or, if you can find a credit card that has a 0% introductory interest rate and pay off your balance before the introductory period ends, it can serve as a kind of interest-free small business loan.

Should a Business Owner Consider Using a Personal Credit Card to Fund Their Business?

You probably have a personal credit card, and you might have thought about using the same credit card funding for your business. But if you’re a small business owner, it’s a smart idea to have a separate credit card for business use.
Why?

When you file taxes, you likely deduct business-related expenses. Having a separate card makes your accounting and tax filing easier because it helps you avoid mingling your personal and business expenses.

Cards designed for businesses may also offer benefits intended to be useful to them, like travel and lodging perks and cash back for purchase at retailers like office supply stores. Of course, what’s useful to your business depends on its unique needs, and business cards don’t always have the same protections as consumer cards, so it’s important to read and understand the terms of any card you apply for.

If you’re interested in getting small business funding with a credit card but not sure where to start, consider these top small business credit cards for your company.

Recommended: What Are Debt Instruments?

Pros and Cons of Credit Card Funding

Credit card funding does offer many benefits, but it’s not without its drawbacks. It’s a good idea to weigh them both carefully.

Pros of Credit Card Business Funding

Credit card funding offers many benefits if you’re looking for a versatile financing option.

Potential for Rewards

There are many business credit cards that come with rewards programs. For each purchase you make, you can earn points that can be redeemed for travel, gift cards, and/or cash back. This may help offset any fees charged.

Credit Replenishment

Loans for business typically involve a lump sum you receive once in its entirety. But credit cards can be used indefinitely, as long as you pay your balance. Once you pay your balance, you have access to the full credit line again.

May Be More Affordable Than Some Financing

Though credit cards often come with hefty interest rates, they may be a cheaper form of financing than options like merchant cash advances and alternative loans, particularly if you can get a promotional low or 0% interest rate. If you don’t qualify for low-interest bank or SBA loans, business credit cards may be your next best solution.

Cons of Credit Card Business Funding

With any form of financing there are also downsides. Here are a few factors to be aware of.

Can Be Expensive if You Don’t Pay Off Your Balance

Business credit card annual percentage rates (APRs) currently average 22.15%. Those rates are no joke. Keeping a balance on your credit card means you’ll pay more and more for a purchase over time. Paying off your balance in full as soon as you can may keep your financing costs down.

May Have Other Fees

In addition to interest rates, business credit cards often carry other fees, too. You may pay a fee for a balance transfer. If you’re using it to fund your bank account, you may be hit with bank card funding fees. Paying late may result in fees. And there may be annual fees. Read the fine print to understand all potential fees you might be charged.

May Not Provide Enough Capital

Credit cards offer access to a certain amount of credit, but you may need significantly more to start or grow your business. Your card probably won’t cover larger expenses like purchasing real estate or expensive equipment. If your needs exceed your credit limit, you may have to take out an additional loan or business line of credit.

Other Startup Funding Options

Business credit card financing is far from your only option if you’re looking for capital for your business. No matter what your credit score, there’s likely to be a small business financing solution for you.

Small Business Loans

Term loans give you a lump sum of cash upfront that you repay (plus interest) in regular, often monthly, installments over the term of the loan. While banks will typically only lend to businesses with strong credit and at least two years of business history, online lenders generally have more flexible qualification criteria and are also usually faster to fund.

Business Lines of Credit

You already know how a line of credit works, since that’s essentially what a credit card is. However, an actual business line of credit gets you access to a set amount of cash that you can withdraw as needed. You only pay interest on the amount you draw. Once you repay the funds, the full credit limit is available again.

Invoice Financing

If you don’t qualify for other types of financing but have receivables, you might consider invoice financing. With this type of funding, lenders advance a percentage of your unpaid invoice amount — potentially as much as 90%. When your customer pays the invoice, you receive the remaining percentage, minus the company’s fees.

Equipment Financing

If you’re looking to purchase equipment but don’t have good business credit, equipment financing may be worth looking into. The equipment you’re purchasing, whether that’s a computer, a company vehicle, or a threshing machine, serves as your collateral, which means you may get a lower interest rate than with other types of financing.

Merchant Cash Advances

If your business has credit or debit card sales, needs cash quickly, and has poor credit, you might consider a merchant cash advance (MCA). With an MCA, a company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee. This tends to be one of the most expensive forms of small business financing.

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The Takeaway

If you need a tool to help you purchase items for your small business, credit card funding has a lot to offer. It’s versatile, may offer rewards, and, depending on your credit, may be more affordable than other funding options.

If you want to explore business financing, small business loans could be a good option.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Photo credit: iStock/Dmytro Skrypnykov
SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSB0424071

Purchase order financing provides funding for businesses to buy goods needed to fulfill outstanding customer orders. It can be a useful solution if your business relies on a third party to supply or manufacture the goods that you sell and you sometimes struggle with cash flow.

Purchase order financing comes at a relatively high cost, however. Here’s what you need to know about this type of funding, how it works, its pros and cons, plus alternatives you might consider.

Purchase Order Financing Definition

Purchase order financing, also known as PO financing, is essentially a cash advance that a company can use to fulfill its purchase orders. With this type of financing, a lender will pay a third-party supplier up to 100% off the cost involved in producing and delivering goods to your customers.

If your business is new or has received multiple orders at once, and you don’t have the inventory or cash on hand to complete them, PO financing could be a solution. Rather than turn customers away, you could use this type of financing to pay your suppliers to fulfill the order.

While you often need strong credit to get a traditional small business loan, that’s not necessarily the case with PO financing. Purchase order financing companies are typically willing to work with small businesses and startups that have thin or bad credit. These lenders tend to be more concerned about the creditworthiness of your customers, since they will be repaying much of the loan.

Recommended: Typical Small Business Loan Fees

How Purchase Order Financing Works

To understand how purchase order financing works, here’s an example. Let’s say you receive a large order from a customer but discover that you don’t have enough inventory on hand to fill it. After reaching out to your supplier, you determine that you don’t have enough available cash to purchase the goods needed to fulfill the order either.

Rather than turn your customer away, you reach out to a PO financing company. As part of your application for funding, you send the lender your purchase order as well as your supplier’s estimate. If the lender approves you for PO financing, they will then pay your supplier all, or a large portion, of the invoiced amount. If, for example, the lender approves you for just 90% of the supplier’s costs, you would need to cover the remaining 10% on your own.

The supplier then fills the order and sends the product to your customer. Next, you invoice your customer, who sends payment directly to the lender. The lender then deducts their fees and sends you the balance.

Who Uses Purchase Order Financing?

You might consider PO financing if your business needs to purchase goods or supplies from a third party in order to fill customer orders but doesn’t always have enough cash reserves to make those purchases.

Types of companies that may use PO financing include:

•  Startups

•  Business owners with low credit scores

•  Wholesalers

•  Distributors

•  Resellers

•  Importers/exporters of finished goods

•  Outsourcers

•  Government contractors who are fulfilling government orders

•  Companies with seasonal sales

Purchase Order Financing Pros and Cons

There are advantages and disadvantages to small business purchase order financing. Here’s a look at how the pros and cons stack up.

Pros

•  Enables you to take customer orders you otherwise could not fulfill. Purchase order financing allows you to serve customers despite seasonal dips in cash flow and/or take on an unusually large order from a customer.

•  Can be easier to get than other types of business loans. While PO financing companies will look at your business’s financials and credit history, they are typically more interested in the creditworthiness of your customers and the reputation of your supplier. As a result, it can be easier for startups and businesses with less-than-stellar credit to qualify for PO financing compared with other types of business funding.

•  You don’t need to make regular loan payments. Since PO financing is more of a cash advance than a loan, you won’t need to pay the money back in regular installments like you would with a regular term business loan.

Cons

•  Can be costly. PO financing fees may seem relatively low at first glance, often ranging between 1% and 6% of the total supplier’s costs per month. But when that rate is converted into an annual percentage rate (APR), they are actually fairly high, potentially 20% or significantly more.

•  Cost depends on your customer. Since fees are charged per month, how much you will end up owing the PO financing company will depend on how long it takes your customer to pay their invoice. This can make it difficult to estimate the total cost upfront.

•  You’re cut out of the process. With this type of financing, the lender and supplier often take over most of what you normally do. In many cases, the lender will pay the supplier, the supplier will ship the product to the customer, and the customer will pay the lender. As a result, you won’t have the usual amount of quality control.

Recommended: What Are the Best Crowd-Funding Sites?

Typical Purchase Order Financing Rates

Purchase order financing rates can run high. They are often quoted in monthly percentage rates, usually in the 1% to 6% range. This percentage is charged on the supplier’s invoice amount, and your total fee will depend on how long it takes your customer to pay the purchase order financing company.

If the supplier’s bill is $100,000 and the lender charges 3% per 30 days, for example, the fee will be $3,000 if the customer pays within 30 days. If the customer pays in 60 days, the fee will be $6,000.

Applying for Purchase Order Financing

Purchase order financing is primarily offered by online financing companies, some of which specialize in PO financing. Some banks offer PO financing but typically only offer it to large companies or existing clients.

To qualify for PO financing, you usually need to:

•  Have a purchase order of $50,000 or more

•  Sell finished goods (not parts or raw materials) that you don’t make yourself

•  Sell to business-to-business (B2B) or business-to-government (B2G) customers

•  Have profit margins of at least 20%

•  Have creditworthy customers (some lenders will conduct a detailed credit check on your customers)

•  Have reputable and trustworthy suppliers

If you meet the basic criteria for PO financing and want to apply, you’ll typically need to have the following documents:

•  The customer’s PO

•  Your supplier’s invoice

•  Your invoice to your customer

•  Your purchase order to your supplier

•  Information about your business

•  Financial statements (such as your balance sheet, income statement, and cash flow statement)

•  Tax returns

Recommended: What Is EBITDA?

Alternatives to Purchase Order Financing

If PO financing doesn’t sound like the right financing solution for your business, you’re not necessarily out of luck. There are a number of other small business financing options that can help smooth out dips in cash flow and help you grow your business. Here are some to consider.

Invoice Factoring

Invoice factoring is a type of invoice financing that involves “selling” some or all of your company’s outstanding invoices to a third party, called an invoice factoring company. The factoring company will typically pay you 80% to 90% of the invoice amounts right away. They then collect payment directly from your customers (which, unfortunately, will tip your customers off about your financial struggles). Once the factoring company gets paid by your customers, the company will pay you the remaining invoice amount — minus their fee.

Small Business Loans

With a traditional term business loan, you receive a lump sum of capital upfront and then pay it back (plus interest) in regular installments over a set term. While banks typically have strict criteria for business loans, online business lenders tend to have more flexible qualification requirements and are faster to fund. A short-term business loan from an online lender can help solve a short-term cash crisis, but rates and terms are generally higher than bank loans.

Merchant Cash Advances

A merchant cash advance (MCA) might be an option if you do business using credit card transactions. With an MCA, you get a cash advance in exchange for a fixed percentage of future credit card receipts. Typically, the MCA provider automatically deducts a daily (or weekly) percentage of your debit and credit card sales until the advance, plus fees, is repaid in full. While an MCA can be a quick source of cash, this is one of the most expensive ways to finance a small business.

Business Lines of Credit

You can also use a business line of credit for short-term financing. Similar to how a credit card works, a line of credit allows you to draw up to a certain limit and only pay interest on the money you borrow. You then repay the funds and can continue to draw on the line. A business line of credit can be used for a variety of immediate needs, such as managing cash flow, buying inventory, or paying employees.

Recommended: Guide to Debt Instruments

The Takeaway

Purchase order financing provides funds to buy needed items to fulfill business needs. If it isn’t right for you, you may want to shop around and compare other small business financing options.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

FAQ

Is PO financing a loan?

Purchase order financing is technically not a loan, since it doesn’t provide you with a lump sum of capital you then pay back in installments. It’s considered a cash advance.

What documents are required for purchase order financing?

To apply for purchase order financing, you’ll need to provide a number of documents, which may include the customer’s purchase order, your supplier’s invoice, information about your business, financial statements (such as your balance sheet, income statement, and cash flow statement), and personal and business tax returns.

Can purchase orders be used as collateral?

Not typically. With purchase order financing, however, a purchase order acts somewhat like collateral to back your loan. With this type of financing, a lender will give a company a cash advance based on the amount of a purchase order.

Photo credit: iStock/Kerkez

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you’re interested in exploring your entrepreneurial side and breaking free of the traditional 9-to-5, you might consider opening a small business. But it’s not something to venture into without mapping out a strategy for success first.

There’s some groundwork that needs to be laid when you’re working toward owning a business. That includes refining your concept, taking care of the legal aspects of starting a new company, and getting your finances in order.

If you’re looking for a checklist of steps to follow when you’re starting your new business, this guide can help.

1. Research Your Idea

At the core of every successful business is a great idea. Depending on the type of business you’re interested in starting, you may have what you believe is a winning concept for a product or service you’d like to offer.

Before you get too far along in the process of starting your new business, however, it’s important to do some market research. Specifically, you should be thinking about these questions.

•   How original or unique is this concept?

•   Are there other businesses with a similar product or service?

•   How successful are those businesses and who are the biggest competitors?

•   What’s the long-term outlook for this product or service like?

•   How much demand is there overall for what I plan to offer?

At this stage, the goal is to determine whether owning your own business is viable, based on what you envision for your products or services.

If you’re entering into an established industry, you should have an idea of what share of the market you may be able to claim. And if you’re having a hard time finding any competing businesses in your niche, then it’s important to understand why. That could be a sign that your idea or niche focus is too narrow.

2. Identify Your Target Customers

Part of conducting market research when starting a small business involves finding your target customers. These are the people who are most likely to buy your product or service.

Creating an avatar that embodies your ideal customer can help. As you create your avatar, try to paint as clear a picture as possible and consider things like:

•   Basic demographics such as age or gender

•   Income and employment

•   Education level

•   Geographic location

•   Hobbies or interests

It’s also important to consider what problems your ideal customers are facing that your business can help to solve. Being able to solve problems and offer solutions is one of the keys to owning a business that has staying power.

Recommended: Business Growth Strategies

3. Draft a Business Plan

A business plan is an important document to have when starting a new business. This is essentially a roadmap or playbook of how you plan to start, run, and grow the business over time.

There are different formats business plans can take, depending on the scale of the company you’re trying to start. A traditional business plan includes an executive summary and description of the company. But it also covers things like:

•   Market research and analysis

•   Organization and management structure

•   Details about the products or services you plan to offer

•   Marketing and how you plan to promote the business

•   Estimated startup and operational costs

•   Key financial ratios, such as estimated profit and loss

Broadly speaking, your business plan should identify what your goals for the business are and how you plan to go about achieving them. Writing a business plan can help you get organized in the early stages of starting a small business and give you a reference that you can check your progress against.

4. Plan Your New Business Budget

One of the most important steps in how to set up a business involves estimating your costs. The cost to start a business has two dimensions: estimating how much money you’ll need to get the business up and running and how much you’ll have to spend on an ongoing basis to maintain it.

When calculating startup costs, consider everything you may need to spend to get off the ground. That may include things like:

•   Leasing a space if you’re starting a brick-and-mortar business

•   Utility, cellphone, and internet service deposits

•   Purchasing or leasing equipment

•   Hiring and training staff if you plan to have employees

•   Purchasing necessary business licenses and/or paying registration fees

•   Marketing and promotion costs

•   Production costs to create your products

•   Website hosting and/or ecommerce setup

Those are the bigger expenses you may need to plan for when starting a new business. Once the business is open, your small business accounting will include ongoing costs such as:

•   Rent or lease payments

•   Utilities

•   Payroll if you have employees

•   Supplies and equipment

•   Marketing and advertising costs

•   Basic living expenses

If you plan to stick with your current job while owning your own business in the early stages, then you may have steady income that can cover your living expenses. But those may not be enough to cover your business expenses until your venture begins turning a profit. For that reason, it’s important to consider the next step in the process.

5. Weigh Financing Options

When deciding how to start your own business, finances are a focal point. You need to know what you’re set to spend–and how you plan to pay for it.

Bootstrapping could be a possibility if you have a sizable amount of cash tucked away in savings that you could tap into. But that may not be a reality, in which case you’ll need to explore other options for small business financing. There are two broad categories of business financing: equity and debt.

Equity Financing Explained

With equity financing, you exchange an ownership stake in the business for funds from investors. This is typically how angel investing or venture capital investing works.

The upside of this type of business financing is that there’s nothing to pay back. This can be a real advantage as you’re attempting to achieve a positive cash flow while you get your startup off the ground. And whether the business succeeds or fails, with equity you’re not obligated to make investors whole financially. So the investor shoulders much of the risk in this financing equation.

The trade-off, however, is that each equity investor owns part of your business and as such, can have a say in how it’s run. That may not be ideal if you’d prefer to have complete control over business decision-making.

Equity financing is a popular startup funding option if you’re hoping to eventually go public with your company. Once a startup goes public, angel investors or venture capitalists can sell their shares and get back what they put into the business. But if you’re interested in owning a business on a smaller scale, debt financing may be the better choice.

Debt Financing Explained

Debt financing is just what it sounds like: debt you take on to fund your business. For example, that can mean:

•   Small business loans

•   Small business lines of credit

•   Small business credit cards

•   Personal business loan or lines of credit

You borrow a set amount of money and agree to pay it back to a lender, typically with interest. Small business loans can be found at traditional banks and credit unions or through online lenders.

Starting a small business with debt may not be a perfect solution but you don’t have to give up any of your ownership. And you can compare loans for small businesses or personal loan options to find one that fits your budget and offers the best repayment terms, based on your credit profile. Comparing rates for loans will help.

Small Business Grants

There’s also a third potential funding option you may consider in lieu of debt or equity financing. Small business grants can provide funding to start a new business with no repayment required. Getting small business grants can be time-consuming and competitive, however, so if you need money to start a new business quickly you may want to explore loans instead.

6. Choose a Business Name

By this point, you’ve covered most of the biggest hurdles associated with how to set up a business. From here, you can tackle some of the smaller, yet still important tasks associated with starting a small business beginning with choosing a name.

When selecting a name for your small business, consider what kind of brand reputation you want to build and what you want to be known for. You may choose your own name or something that embodies what your business is all about.

Before finalizing your choice of name, do your homework. Specifically, make sure the name isn’t trademarked or otherwise being used by any other business entity, as this could create legal headaches later. If you plan to launch a website or social media accounts for your business, you’ll also want to check to see if your business domain name and social media handles are available.

Recommended: Commercial Real Estate Loans

7. Determine Your Business Structure

Choosing a legal structure is next on the list of steps to starting a business and you can’t skip this part. A legal structure means how your business will operate. The most common business structures are:

•   Sole proprietorship

•   Partnership

•   S-corporation

•   C-corporation

•   Limited liability company (LLC)

Your choice of business structure matters for a few reasons. First, it determines what kind of liability you have in situations where your business is sued. With a sole proprietorship, for example, you and the business are treated as one and the same. So if you’re sued by a customer or supplier, then your personal assets could be attached if a judgment is entered against you in civil court. An LLC, on the other hand, shields your personal assets.

Your choice of business structure can also affect taxation and how you pay taxes. Again, with a sole proprietorship you and the business are treated as one and the same for tax purposes. Corporations, however, are taxed differently so depending on how much profit you anticipate the business generating, one structure may be better than another.

A third consideration has to do with getting business funding. If you plan to take out one or more business loans, then your business structure may influence what type of financing you’re able to qualify for and how much you can borrow. Banks typically can be reluctant to loan money to sole proprietorships, for instance, and they can’t sell stock.

Recommended: EBITDA Explained

8. Make Your Business Legal

If you have a business name and structure, the next step is making your business legal. This may include:

•   Registering your business with state and local agencies

•   Obtaining an Employer Identification Number (EIN) from the IRS and a state tax ID if needed

•   Securing any licenses or certifications required to operate

•   Filing trademark or patent applications for business names or products, if applicable

What, if any of these steps, are required for starting a small business will depend largely on where you plan to do business. Some states may require a separate tax ID to go along with your federal tax ID while others don’t, for instance. Depending on what type of business you plan to operate, you may need a special license before you can open your doors.

If you’re unsure what you need to do to register, contacting your local chamber of commerce or your state’s business development agency can be good places to start. Keep in mind that you may need to pay certain fees to register or obtain necessary licenses when starting a small business.

Recommended: Amortization vs. Depreciation

9. Open a Business Bank Account

Once you’ve registered your business and made it legal, you can open a business bank account. Having a separate bank account can make sense when owning your own business for a few reasons.

First, this is a good way to keep business and personal expenses separate. When you’re paying your household bills and business expenses out of the same account, it can get confusing as to which funds are going where. It’s easier to keep track of business cash flow and personal cash flow when they’re in separate accounts.

Next, having a business bank account can make filing taxes easier. If you plan to deduct certain business expenses, then having all of those expenses linked to a single account can minimize headaches when filing taxes. Separate business and personal bank accounts may also be necessary if you want to avoid mingling funds because you’ve chosen something other than a sole proprietorship as a business structure.

When comparing business bank accounts, pay attention to fees you may pay, as well as minimum deposit or minimum balance requirements. Also consider whether the account offers access to merchant services if you need help with things like payroll or accounting.

10. Hire Staff and Plan Workload

Not all startups will require employees, especially in the beginning. But if yours does, it’s a good idea to figure out what areas you’ll need help in and for how many hours you want employees to work. If you’re running a coffee shop, for example, you will likely need at least one other barista to spell you.

At this point, you may be able to start figuring out what tasks will need to be done each day and each week, how long they’ll take, and who can do them. In your coffee shop, someone will have to get there early to prepare the tables, make the coffee, and set up. And at the end of the day, someone will have to stay late to clean up and close down the shop.

Depending on how much project management is involved in your particular startup, you may want to use task management software to track what needs to be done and who will do it. You should already have budgeted for payroll, but it’s also important to figure out when and how often each employee will be coming in and what exactly each will be working on.

The Takeaway

After reading through this list of steps to starting a business, it can seem like a lot. But breaking down each step into smaller, actionable tasks can make the process less daunting.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

Photo credit: iStock/svetikd

SoFi's marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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