Small Business Financing: Know Your Options
Small businesses need money to survive.
Nothing novel there. All businesses need money to survive. The problem is, small business financing is more difficult to come by than funding for larger businesses, which makes it all the more crucial for entrepreneurs to understand the ins and outs of securing it.
Small businesses represent a higher risk compared to their more sizable brethren. They can be unproven, have narrow revenue streams, possess few financial backstops — all red flags for would-be financiers. As a result, some potential sources of funding tighten up their conditions for small businesses or refuse to deal with them at all.
Fortunately, small companies in need of funding still have plenty of options. Here are some of the most prominent:
Traditional Loans
You’re certainly familiar with the concept of a loan — a bank or another financial institution lends your business money, which your business pays back over time, with interest payments.
The most basic type of traditional loan — the bank loan — sometimes can be hard to come by, however. Many banks’ lending standards can be strict, disqualifying many small businesses or making the terms too onerous for it to be worth it. Still, if you have good credit and a solid financial model, this is an option.
Along the same lines, you might also consider a small business line of credit. Unlike a loan, where you immediately tap the funds and begin repayment, a line of credit is more like a credit card: a source of future funding when and if you need it. So, for instance, you could apply today for a $10,000 line of credit — and if you don’t use any of it for a year, you don’t pay interest on it. If you need just $2,000 from your line of credit, you don’t have to take a dime more.
Small Business Administration (SBA) loans are another option. The SBA provides guarantees to loans provided by private lenders, typically with much more digestible terms. You have to meet several eligibility requirements, and they’re not guaranteed, but they’re a viable option for many budding companies.
Similar but different is the Small Business Lending Fund (SBLF). With the SBLF, the government actually provides capital through certain lenders — typically community banks and community development loan funds.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending can feel like traditional bank loans in that you’re receiving money in exchange for later repayment with interest. P2P funds can come from a wide variety of lenders, from wealth advisors and alternative asset managers to regular Joes. You can typically borrow smaller amounts than you can from a bank and for lower fees. However, unlike bank loans, these are not FDIC-insured, so borrowers and lenders alike take on some additional risk here.
Microlending
Microlending is similar to peer-to-peer lending in that it involves small dollar amounts — rarely above five digits. However, microlenders tend to be smaller, nonprofit organizations that lend to specific categories of lenders, such as veteran-owned or minority-owned businesses.
Angel Investing
While they can vary on a case-to-case basis, angel investors are typically individual investors who provide seed capital in exchange for equity in startup and early-stage companies. The upside: Because it’s not a loan, your business doesn’t have to pull money out of its pocket to repay the angel investor on a regular basis. And because angel investors tend to be successful businesspeople themselves, they may provide guidance and even mentoring. The downside? Because they know how precious funds are early on, they often ask for a huge chunk of ownership up front — much more than what the same money could buy later in your business lifecycle. So you have to be cautious about giving up too much control over your company.
Venture Capital
Venture capital (VC) is financing and expertise provided to startups and early-stage small businesses, typically by investment banks, pension funds, insurance firms and even wealthy individuals. While both angel investors and VCs invest in younger companies, venture capitalists tend to lean toward slightly more mature companies than the latter, and they tend to provide more money on the whole. But the pros and cons are similar: VCs can also provide leadership and technical expertise … but they can also request large levels of control over the company in exchange for their funds.
Crowdfunding
Crowdfunding can be broken down into two types: donation and investment. The former includes the likes of Kickstarter, Indiegogo and Causes, where people donate to your business without necessarily expecting an investment return. Usually, instead, a donor might be promised, say, some of your final product — a game maker might provide them with a board game, for instance. Investment crowdfunding, on the other hand, involves platforms that allow several small-money investors to purchase miniature stakes in a business.
Do You Need Small Business Financing? Talk to the Pros.
Our advice? Don’t scramble to look for funds on your own. Talk to seasoned professionals who can help you determine what type of funding is best — and set you on your path.
McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that offers custom services to companies across a broad spectrum of industries. Our consulting services include helping you determine what kind of financing is right for you, and in the event you’re considering exchanging equity stakes, we can even help you with business valuations.
Find out more about what we can do for you and your small business financing needs. Call us at 440.892.8900 or contact us online today.
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