Financing a Business
Starting a business can be expensive. Some statistics say it may take up to three 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 Five 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 six years). Microlenders will approve loans to those with low credit scores, which 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! Many cities in northeast Missouri, due to their low populations, qualify for many of the loans.
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.”
Although there are numerous infomercials and “consultants” that insist the federal government offers millions of dollars in “free money” and grants to give to individuals for business start-ups, the reality is that the federal government does not provide grants for starting and expanding a business. Grants from the federal government are only available to non-commercial organizations, such as non-profits and educational institutions in areas such as, medicine, education, scientific research and technology development. The federal government also provides grants to state and local governments to assist them with economic development. Most grants from Missouri agencies are only available to local governments for projects related to infrastructure or schools. The current exceptions are grants for research and development of value-added agricultural products and the other is for products made from recycled materials. These grants are not necessarily “free money” requiring the recipient to match funds or combine the grant with other forms of financing such as a loan.
In our rural area, the USDA has a lot to offer. The USDA loans and grants are not all agriculture-based. They may fund other projects. Many cities in northeastern Missouri, due to the low population, may qualify for many of these loan and grant programs.
But don’t forget about state or local programs, nonprofit organizations and other groups. Large companies may grant funds to an initiative that aligns with their product or values.
If you are interested in seeing what kind of funding might be available for your business, here are some websites to search:
- Search for Federal Grants: www.Grants.gov
- Membership required to access a national database of foundations and corporate giving programs, religious grant makers and other organizations with grant making programs: www.GrantStation.com.
- Free and low cost resources for grant seekers: www.FoundationCenter.org.
- Membership required to access nationwide grant seeking: www.FCOnline.FoundationCenter.org.
- This private organization provides $1,000 in grants to anyone who currently owns a business or is planning to start one. Awards are primarily based on innovation and originality www.BusinessOwnersIdeaCafe.com.
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 four 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 startup 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.
We encourage you to take advantage of free/reduced priced training and complimentary counseling services available here in northeastern Missouri, featuring resources to help grow your business! Have a counselor contact you, or call 660-665-3348 to make an appointment.