Financing Your Business
Starting a business can be expensive. Some statistics say it may take up to 3 years for a business to become profitable. Where will you find the funds?
Small Business Loans
Loans are probably the most popular source of startup financing. Learn about the 5 C’s of credit to get some insight on what lenders are looking for.
The Small Business Administration (SBA) has developed several programs and works with local banks to provide a variety of funds to small businesses. SBA loans are attractive to banks because the SBA will guarantee a large portion of the loan. So if the loan defaults, the bank is not left with empty-pockets. SBA loans are attractive to small businesses because they can have longer amortization times, and lower collateralization rules.
Traditional lenders can also offer a business line of credit. This can be very useful to fill any cash flow gaps in the normal cycle of running a business.
Microloans are short-term loans of $50,000 or less. There is a higher interest rate associated with a microloan, and a shorter time to pay the loan back (usually about 6 years). Microlenders will approve loans to those with low credit scores. Could be a good solution for gap financing. Some examples of microlenders are Justine Petersen, Accion, or the Opportunity Fund. The SBA has posted information about their microloan program.
The USDA offers many types of loans to rural areas – and not all of them have to do with agriculture! Here in northeastern Missouri, we qualify for many of these loan programs because of our low population.
The myth: The government is giving away free money to start your own business!
The reality: Startups are risky and expensive. From the SBA: “Government grants are funded by your tax dollars and therefore require very stringent compliance and reporting measures to ensure the money is well spent. As you can imagine, grants are not given away indiscriminately.”
Yes, there are grants that are available to certain businesses in certain situations. In the majority of cases, you will have to bring a percentage to match what money is granted.
If you are looking at securing a government grant, check out www.Grants.gov, which lists all available grants from all departments. Or, you can go to individual department websites for more information.
In our rural area, the USDA has a lot of offer. The USDA loans and grants are not all agriculture-based. They will fund other projects. Here in northeastern Missouri, we qualify for many of these loan and grant programs because of our population.
But don’t forget about state or local programs, nonprofit organizations and other groups. And large companies may grant funds to an initiative that aligns with their product or values.
Out of pocket personal investments – Typically, this is the first step to financing your business – your own savings.
Friends and Family – Also called Peer-to-Peer (P2P) lending, borrowing money from Friends and Family has been a source of financing for generations. Be careful though, and make sure you have everything in writing as to what is expected from each party. Make sure all payments, interest rate, and amortization is all spelled out, as well as what happens if payment is not made.
Bringing on a Partner – Make sure you and your partner have an agreement with what each of you brings to the table for the business, and what is expected of each of you. What happens if one of you is not fulfilling your end of the agreement? That should all be put in writing too.
Online loans – There are dozens of online lenders willing to lend money. The pros include a simple application process, less restrictions than a traditional bank loan, and a quick turnaround time. But be careful! Some charge very steep interest rates, higher APR and shorter terms. Although there are many types, we’ve broken them down into 4 broad categories (companies are examples only and may offer more than one product, this list is not inclusive):
- Term loans & peer-to-peer lending are your traditionally structured loans plus interest that are repaid in a set time based on set terms. Lenders like Prosper, Lending Tree, Kiva and Funding Circle are examples.
- Lines of credit can help manage cash flow cycles or short-term needs like inventory or payroll. Examples are: OnDeck, Kabbage, SmartBiz.
- There are also specialty lenders that loan against outstanding invoices like BlueVine, Dealstruck and Fundbox. This type of lender tends to deal more with B2B companies.
- Merchant cash advances provide up-front cash in exchange for a portion of credit/debit card sales. Proper cash flow planning is highly recommended. Examples are: CAN Capital, Fundera, and Merchant Cash & Capital.
You can compare different products at Nerd Wallet.
Crowdfunding – Entrepreneurs raise funds by reaching out to a large number of people through an online platform. They create an online campaign video about their venture/idea/product, indicate the amount of money they are seeking, what it will be used for, and what investors will get in return. There are a handful of sites out there, some of the more common are Kickstarter, Indegogo, Kiva and Go Fund Me. Each site’s fine print differs, so make sure you understand what you are signing up for. This could be a good option for startups businesses.
Owner Financing – In some cases, for example, when you are purchasing a business, real estate, or large equipment, the owner may choose to hold the note on the item, and have you pay for it in monthly installments (principal + interest).
Angel Investors/Venture Capital – Angel investors are individuals who loan money to small businesses that align with their interests or values. Venture Capitalists are usually businesses or investment groups. Venture Capitalists generally have larger amounts to loan. With both Angel Investors and Venture Capital, investors are not looking for a long-term situation. They want to make their money back quickly with interest, so make sure you’ve got an exit strategy planned for repayment.