For many small businesses, accessing finance can be a matter of life and death.
The stakes are particularly high when you consider that 18.4% of US companies fail within the first year, 49.7% after five years and 65.5% after 10 years, according to a LendingTree analysis of US data Bureau of Labor Statistics. One of the main reasons companies go under is lack of funding. It is therefore particularly important to know who to turn to when you need a lifeline.
While the options may depend on factors such as size, industry, quantity needed, time frame, and purpose, here are eight options to consider:
1. Family and Friends
This can be a great place to go as it generally doesn’t come with many financial background requirements or other requirements. “Uncle Charlie will be more willing to believe in you without asking for extensive financial documentation,” said Joshua Oberndorf, a manager in EisnerAmper’s Private Business Services Group.
Advantages: Easy access to needed funds without high interest rates.
Disadvantages: Failure to repay monies on time or abandon the waiver entirely could affect family relationships. “Money is both accounting and psychological,” Oberndorf said.
What else you should know: According to the IRS, family members should charge a minimum interest rate to avoid adverse gift tax consequences. The IRS publishes these Applicable Federal Rates (AFRs) monthly.
Advantages: Trusted and established funding source. Can be less expensive than other options and offers the opportunity to grow the credit and banking relationship over time.
Disadvantages: Banks can have stringent lending requirements, including good personal credit and sufficient cash flow and income, which may be unattainable for some borrowers, and the process can be slow, sometimes taking several weeks to secure a loan.
What else you should know: According to LendingTree, interest rates can range from about 3% to about 7%. Consider a smaller bank, which may be more willing to lend and walk you through some of your options, said Matt Barbieri, a chartered accountant at Wiss & Co. who offers business advisory services.
3. Online Lenders or Funders
Advantages: Provides quick access to capital, generally through a simple online process.
Disadvantages: It can be difficult to see the true cost of capital, especially with a merchant cash advance, which is an upfront payment that a business must pay back at a percentage of debit and credit card sales plus a fee. Some online lenders and funders may not have a long-standing track record and the option may be more expensive than others. For example, an online loan has an APR of between 7% and 99%, while the approximate APR of a cash advance at merchants ranges from 40% to 350%, according to NerdWallet.
What else you should know: Do your due diligence on any online lenders or funders you plan to use, said Craig Palubiak, president of Optim Consulting Group. Make sure the company has a good reputation and multiple good reviews, and be sure to compare multiple options. It is also important to break down the total cost of capital, taking into account the interest rate, any fees and any prepayment penalties.
Use an online calculator to understand the true cost of a dealer cash advance.
4. SBA Loan
Advantages: Federal support provides access to cheap bank financing for small and large loans. There are different types of loans and lenders and programs have unique eligibility requirements. Resource centers are available to help business owners, including those in underserved communities.
Disadvantages: The approval process can be slow. The period depends on the loan, but can usually take a few months. A deposit or security deposit may be required. Applicants with poor credit may not be admitted.
What else you should know: There are different types of SBA loans and maximum amounts vary. The most common SBA loan type is called a 7(a), and you can expect to pay anywhere from 7% to 9.5%. “Be prepared to work on a refinancing as soon as the agreement allows,” Barbieri said. This will allow you to remove personal guarantees and restrictive agreements that can stifle growth, he said. An SBA loan may offer a longer repayment period—up to 10 years for equipment and working capital under the 7(a) program; 25 years for real estate – and can offer competitive interest rates compared to traditional bank loans.
5. Credit Cards
Advantages: Fast access to capital with the possibility of bonuses. It could be a good option for short-term financing needs if you are confident that you can pay off the debt before interest accrues. Business cards typically have higher credit limits than personal cards.
Disadvantages: Interest rates can be high. Cards that are ranked well by Creditcards.com offer APRs ranging from almost 10% to almost 35%, and some cards charge an annual fee. Generally not a good option for large financing needs.
What else you should know: “Don’t rely on it as the sole source of growth funding; if you’re taking too much risk on the other categories, you should seriously consider doing so before engaging in consumer lending as a business,” Barbieri said.
Sources of financing can be private grants, private equity and private individuals with investment capital.
Advantages: Positive cash flow as well as expertise to drive the business forward.
Disadvantages: Dilution of capital, difficult to find the right match.
What else you should know: Palubiak encourages owners to use their network and partner with start-up communities and local organizations to create investor connections.
“Date as long as possible before choosing your partner,” Barbieri said. “Make sure their goals match your goals or it will end badly.”
7. Grants from the federal government, the states and economic development
Advantages: Typically non-dilutive, can be small or large.
Disadvantages: There may be administrative issues and restrictive admissions requirements.
What else you should know: This could be a good option if you’re a company that can be considered “important” to your area’s infrastructure, Barbieri said. Begin your research by searching the US Economic Development Administration website for resources to find EDA regional offices, state government contacts, and other information.
Advantages: Gives you access to capital without racking up debt and the ability to raise money and increase your brand awareness among potential investors and customers while testing an idea.
Disadvantages: May have a low success rate. Could be fees associated with certain platforms. Also, launching a successful campaign requires marketing resources and time.
What else you should know: There are a growing number of equity crowdfunding websites available. Before choosing a provider, make sure you understand how the platform works, what fees apply, who can invest, and how it might meet your specific funding needs.
SIGN IN: Money 101 is an 8-week financial freedom learning course delivered to your inbox weekly. For the Spanish version of Dinero 101 click here.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.