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 within the first year, 49.7% after five years and 65.5% after 10 years, according to a LendingTree analysis of data from the U.S. Bureau of Labor Statistics. One of the main reasons businesses fail is lack of funding, so knowing where to turn if you need a lifeline is especially important.
While the options may depend on factors such as size, industry, quantity required, time frame and purpose, here are eight options to consider:
1. Family and friends
This can be a great place to turn because it usually doesn’t have many financial background requirements or other prerequisites. This may interest you : Events group Hyve is selling the Ukrainian company through a management buyout. “Uncle Charlie is going to be more willing to believe you without requiring extensive financial documentation,” said Joshua Oberndorf, a manager in the private business services group at EisnerAmper.
Advantages: Easier access to necessary funds without high interest rates.
Disadvantages: Failure to pay back the funds on time, or abstaining entirely, can strain family relationships. “Money is as much accounting as it is psychological,” Oberndorf said.
What else to know: According to the tax authorities, family members must claim a minimum interest to avoid negative consequences for gift tax. The IRS publishes these applicable federal rates (AFRs) on a monthly basis.
2. Banks
Advantages: Reliable and well-established source of funding. To see also : Guide to Business Entities: Which is Right for You?. May be lower cost than other alternatives and gives the opportunity to expand the lending and banking relationship over time.
Cons: Banks can have strict lending requirements, including a good personal credit score and good cash flow and income, which may be out of reach for some credit borrowers, and the process can be slow, sometimes weeks to secure a loan.
What else to know: Rates can range from around 3% to about 7%, according to LendingTree. Consider a smaller bank, which may be more willing to extend credit and walk you through some of your options, said Matt Barbieri, a certified public accountant with Wiss & Co., which provides business advisory services.
3. Online lenders or funders
Advantages: Offers quick access to capital, usually through a simple, online process. This may interest you : Businesses and stakeholders invited to take part in Disadvantaged Business Enterprise webinars on 28 June.
Cons: It can be difficult to see the actual cost of capital, especially with a merchant cash advance, which is an upfront amount that a business is on track to pay back with a percentage of debit and credit card sales, plus a fee. Some online lenders and financiers may not have a long-lasting track record and the option may be more expensive than others. An online loan, for example, has an APR between 7% and 99%, while the approximate APR for a merchant cash advance runs between 40% and 350%, according to NerdWallet.
What else you should know: Do your due diligence on any online lender or financier you plan to use, 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 several options. It is also important to get down to the total cost of capital, taking into account the interest rate, if applicable, fees and any penalties for early payment.
Use an online calculator to help you understand the true cost of a cash advance.
4. SBA loans
Advantages: Federal support provides access to low-interest 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 assist business owners, including those in underserved communities.
Cons: The approval process can be slow. The timeline depends on the loan, but in general it can take a few months. An advance payment or security may be required. Applicants with poor credit cannot be approved.
What else to know: There are different types of SBA loans, and the maximum amounts vary. The most common SBA loan type is called a 7(a), and you can expect to pay somewhere in the 7% to 9.5% range. “Be prepared to work on a refinance as soon as the deal allows,” Barbieri said. This will allow you to remove personal guarantees and restrictive covenants that can stifle growth, he said. An SBA loan may offer a longer repayment period – under the 7(a) program, up to 10 years for equipment and working capital; 25 years for property — and can offer competitive interest rates compared to conventional bank loans.
5. Credit cards
Advantages: Quick access to capital with the possibility of rewards. It can be a good option for short-term financing needs, if you are sure that you can pay off the debt before interest starts to accrue. Business cards tend to have higher credit limits than personal cards.
Cons: Interest rates can be high. Cards rated well by Creditcards.com offer APRs in the near 10% to nearly 35% range, and some cards charge an annual fee. Generally not a good option for large financing needs.
What else to know: “Don’t rely on this as a sole source of funding growth; if you’re too high-risk for the other categories, you should seriously consider that before taking on consumer credit as a business,” Barbieri said.
6. Investor equity
Private grants, private equity and individuals with money to invest can serve as funding sources.
Advantages: Positive cash flow, as well as expertise to help drive the business forward.
Disadvantages: Dilution of capital, difficult to find the right match.
What else to know: Palubiak recommends owners tap into their network and connect with startup communities and local organizations to make investor connections.
“Spend as long as you can date before choosing a friend,” Barbieri said. “Make sure their goals are aligned with your goals or it will end badly.”
7. Federal, state and economic development grants
Advantages: Usually non-dilutive, can be small or large.
Disadvantages: There may be administrative problems and restrictive qualification requirements.
What else to know: This could be a good option if you’re a company that can be considered “important” to the infrastructure in your region, Barbieri said. Start your research by examining resources on the website of the U.S. Economic Development Administration to find EDA regional office contacts, state government contacts and other information.
8. Crowdfunding
Benefits: Gives you access to capital without accumulating debt, and the ability to raise money and increase awareness of your brand among potential investors and customers while testing an idea.
Cons: May have low success rate. There may be fees associated with certain platforms. Launching a successful campaign also requires marketing resources and time.
What else to know: There are a growing number of equity crowdfunding sites available. Before choosing a provider, make sure you understand how the platform works, the fees, who can invest and how it can meet your specific funding needs.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
