If you’ve used up all of your cash and need help to keep your business going, need additional cash to expand your business or need cash to start a new business, there are a number of ways to obtain financing for your small business dream. Below are three common and two relatively new sources for small business financing.
APPLY FOR A LOAN FROM A BANK OR CREDIT UNION
This option is going to be best for an existing business that has been around long enough to be able to demonstrate to a bank an ongoing ability to generate revenue that can be used to repay the loan. The key words here are “generate revenue.” The hard fact is that if your business is not generating revenue, then you’re probably not going to get a loan and most likely, you should seriously consider whether or not you should stay in business.
Now, don’t misunderstand me here. Generating revenue (aka sales or income) is different from making a profit. Lots of businesses can generate revenue and not make a profit; this is very common in the start-up and early stages of most businesses. During this time, the business is spending money on advertising and marketing for customer acquisition, research and development to perfect their product or service, and the purchase of capital assets to be able to conduct business. A loss on paper does not mean that a business is failing. But if your business is spending money on the things I’ve just mentioned and is not generating adequate revenue, then you need to rethink your business model and make changes fast.
One difficulty though, is that you can no longer go to just two or three banks and expect to get one or two yeses. We are still experiencing a week economy and credit can be difficult to get so hang in there and don’t take no for an answer. Do your research and find the names of 10 banks. Then work your way through the list with a strong, straight forward approach and business plan that can demonstrate growth and increased profits in the future. Approach the task in a confident manner and you will find someone who will be happy to lend.
Bank loans can be an option for new businesses however, the bank is most likely only going to be willing to loan a portion of the amount that you need to start or acquire the business. The bank will want you to invest some of your own money as well as investing some of theirs.
LOOK FOR HELP FROM THE SBA
The U.S. Small Business Administration, or SBA, is still around and still in the business of backing loans for new and existing entrepreneurs. SBA loans can be made through banks, credit unions and other lenders who participate with the SBA program. The difference between a regular bank loan and an SBA guaranteed loan is that the SBA is providing insurance to the lender so that if you are unable to make your payments, the lender won’t have to take all of the risk. Lenders are more apt to approve an SBA backed loan.
With the creation of the Small Business Jobs Act of 2012, the SBA can now guarantee up to 90% of the loan amount. This doesn’t mean that you will have to come up with the other 10%. It means that the bank will only be at risk for 10% of the loan amount; the SBA would reimburse the bank for the other 90%.
The SBA can help put you in touch with banks that offer SBA guaranteed loans. Check out their website at www.sba.gov for more information.
THE GOOD OLD CREDIT CARD
Credit cards, while not the best option, are still an option available to small business owners. The pros are that they can be quick and easy to get, have zero or very low introductory interest rates so they can be good for short term financing, and require only minimum payments.
The cons are that pretty much all credit card companies want you to guarantee the account so you will be personally liable for the debt and after the introductory rate expires, the average credit card has an interest rate of 18%. And if you start making late payments, that rate could sky rocket to as high as 24%.
This is not an option that I recommend. However, if you find yourself in a pinch and don’t have any other immediate options, I’ve found that credit unions generally offer credit cards with lower interest rates; most in the neighborhood of only 10%. So be sure to shop around before you sign up.
CHECK OUT ONLINE SOURCES
Internet-based funding sources like Lendingclub.com, Businessfinance.com, and Smallbusinessfunding.com are becoming common place.
These websites bring together groups of smaller investors who are more risk tolerant and looking to make good returns on their money. Individually, they may not be able to invest a whole lot. But as a group, they have more clout.
The sites promote themselves as being more entrepreneur-friendly, having quicker approval and funding times than banks and other lending institutions. However, the draw backs include higher interest rates and shorter payback periods.
THE NEW CROWDFUNDING OPTION
While this may not be a great option for all small businesses it is a new and upcoming source of funding for some. The crowdfunding industry grew to over $5.1 billion worldwide in 2013.
There are two primary types of crowdfunding where small business is concerned:
- Rewards based – where entrepreneurs pre-sell a product or service or offer a perk or prize for each donation to launch their business concept without incurring debt or giving up equity.
- Equity based – contributors receive shares of the company in exchange for the money they pledge.
Crowdfunding works through “platform” websites like Indiegogo, Fundable, and Gofundme that host your fundraising project. You build your campaign page using their inhouse format, launch your campaign, and then monitor your page to see the contributions pour in. But you can’t just sit back and do nothing during your contribution phase; most campaigns require monitoring to respond to questions or comments. In addition, there is a marketing effort required on your part to get the word out and draw attention to your project.
There are also two different types of campaign strategies endorsed by the platform sites:
- Keept-it-All – wherein the fundraiser sets a fundraising goal and keeps the entire amount raised regardless of whether or not they meet their fundraising goal.
- All-or-Nothing – wherein the fundraiser sets a fundraising goal and if the goal is met, receives the funds. But if the goal is not achieved, the fundraiser gets nothing.
While launching a campaign on most sites is absolutely free, if you are successful in raising money, getting it from the site will cost you. Most sites charge a management fee that ranges from 3 to as high as 9% of the funds you raise. In addition, there is a payment processing fee between 3 and 5% plus a per contribution fee. This is because all contributions are done via third party processors like credit card companies or Paypal.
The reality is that money is out there. If you really believe in and have a passion for your business, it will find you. But you do have to make an effort. I would love to hear about any successes or problems that you have had obtaining financing for your small business. Please leave a comment.