The 8 Best Options for Getting Financing for Small Businesses

For many small businesses, access to finance can be a matter of life and death.

The stakes are particularly high given that 18.4% of U.S. businesses fail in the first year, 49.7% after five years, and 65.5% after 10 years, according to a LendingTree analysis of U.S. Bureau of Labor data. Statistics. One of the main reasons businesses fail is lack of funding, so it’s especially important to know who to turn to if you need a lifeline.

While the options may depend on factors such as size, industry, quantity needed, timeframe, and purpose, here are eight possibilities to consider:

1. Family and friends

This can be a great place to turn, as it usually doesn’t come with a lot of financial requirements or other prerequisites. “Uncle Charlie will be more likely to believe in you without the need for detailed financial documentation,” said Joshua Oberndorf, private business services group leader at EisnerAmper.

Advantages: Easier access to needed funds without high interest rates.

The inconvenients: Failure to repay funds in a timely manner, or complete renunciation, could damage family relationships. “Money is as much accounting as it is psychological,” Oberndorf said.

What else to know: According to the IRS, family members are expected to charge a minimum interest rate to avoid negative gift tax consequences. The IRS publishes these applicable federal rates (AFR) on a monthly basis.

2. Banks

Advantages: Reliable and well-established source of funding. Can be less expensive than other options and offers the possibility of developing the lending and banking relationship over time.

The inconvenients: Banks may have rigid loan requirements, including a good personal credit rating and sufficient cash flow and income, which may be out of reach for some borrowers, and the process can be slow, sometimes taking several weeks to obtain. a loan.

What else to know: Rates can range from around 3% to around 7%, according to LendingTree. Consider a smaller bank, which might be more willing to extend credit and explain some of your options to you, said Matt Barbieri, chartered accountant at Wiss & Co., which provides business advisory services.

3. Online lenders or lenders

Advantages: Provides quick access to capital, usually through a simple online process.

The inconvenients: It can be difficult to discern the true cost of capital, especially with a merchant cash advance, which is an upfront sum that a business is required to repay using a percentage of debit and credit card sales, plus expenses. Some online lenders and funders may not have a long track record, and the option may be more expensive than others. An online loan, for example, has an APR of between 7% and 99%, while the approximate APR of a merchant cash advance is between 40% and 350%, according to NerdWallet.

What else to know: Do your due diligence on any online lender or funder you consider using, said Craig Palubiak, president of Optim Consulting Group. Make sure the company has a good reputation and several good reviews, and be sure to compare multiple options. It is also important to explore the total cost of capital, taking into account the interest rate, if any, prepayment fees and penalties, if any.

To help you understand the true cost of a merchant cash advance, use an online calculator.

4. SBA Loans

Advantages: Federal support provides access to low-rate bank financing for small and large loans. There are different types of loans and lenders and programs have unique eligibility criteria. Resource centers are available to help business owners, including those in underserved communities.

The inconvenients: The approval process can be slow. The time frame depends on the loan, but usually it can take a few months. A deposit or a guarantee may be required. Low credit applicants may not be approved.

What else to know: There are different types of SBA loans and the maximums vary. The most common type of SBA loan is called a 7(a), and you can expect to pay between 7% and 9.5%. “Be ready to work on a refinance as soon as the deal allows,” Barbieri said. This will allow you to remove personal guarantees and covenants that can stifle growth, he said. An SBA loan can offer a longer repayment term — under the 7(a) program, up to 10 years for equipment and working capital; 25 years for real estate — and can offer competitive interest rates compared to conventional bank loans.

5. Credit cards

Advantages: Quick access to capital with the possibility of rewards. This could be a good option for short-term financing needs, if you’re sure you can pay off the debt before interest starts accumulating. Business cards tend to carry higher credit limits than personal cards.

The inconvenients: Interest rates can be high. Cards ranked high by offer APRs ranging from nearly 10% to nearly 35%, and some cards charge annual fees. Generally not a good option for large financing needs.

What else to know: “Don’t rely on this as your sole source of funding for growth; if you’re too risky for other categories, consider it seriously before taking out consumer credit as a business,” Barbieri said.

6. Investors’ equity

Private grants, private equity, and individuals with money to invest can serve as funding sources.

Advantages: Positive cash flow, plus expertise to help drive the business forward.

The inconvenients: Capital dilution, difficult to find the right match.

What else to know: Palubiak recommends owners tap into their network and affiliate with start-up communities and local organizations to build relationships with investors.

“Spend as much time as possible dating before choosing your mate,” Barbieri says. “Make sure their goals are aligned with your goals or this will end badly.”

7. Federal, State and Economic Development Grants

Advantages: Generally non-dilutive, can be small or large.

The inconvenients: There may be administrative hassles and restrictive eligibility requirements.

What else to know: It could be a good option if you’re a business that can be considered “important” to your region’s infrastructure, Barbieri said. Begin your search by searching resources on the US Economic Development Administration website to find EDA regional office contacts, state government contacts, and other information.

8. Crowdfunding

Advantages: Allows you to access capital without accumulating debt, and the opportunity to raise funds and increase brand awareness with potential investors and customers while testing an idea.

The inconvenients: May have a low success rate. These may be fees associated with certain platforms. Additionally, launching a successful campaign requires marketing resources and time.

What else to know: There are a growing number of crowdfunding websites available. Before choosing a provider, make sure you understand how the platform works, the fees, who can invest, and how it might meet your specific funding needs.

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Disclosure: NBCUniversal and Comcast Ventures are investors in tassels.

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