Borrowing 101

As a small business owner in need of cash, today you may have many types of financing options. With so many options, it can be a daunting task to identify the best lender and loan type for your small business. To make it easier, we’ve identified the financing options small business owners use most frequently, as well as things to keep in mind when considering these products.

Understanding Financing Sources

The options available today to a small business owner in need of cash can be overwhelming. Funding can come from almost anywhere: Traditional banks. Credit Unions. SBA. Online lenders. Crowdsourcing. And the list goes on ... To make it easier for you to decide what makes the most sense for your small business, we’ve identified the major lenders frequented by other small business owners, as well as some things to keep in mind about their loan products.

Some information on this page is adapted from content that originally appeared on Nav.com, a Venturize supporter.

Banks

Banks are the largest small business lender and probably the first place you think about when getting a loan. They offer some of the lowest cost loans available, but it can be difficult to quality. About 72% of small business owners who apply get rejected. Banks usually require strong personal and/or business credit scores, a personal guarantee, collateral, and healthy financials.

US Treasury Certified
Builds Credit

Credit Unions

Credit unions are not-for-profit organizations that range in size from small, volunteer-only operations to large entities with thousands of members. The basic business model is that members pool their money in the bank in order to be able to loan money to each other and achieve these financial benefits.

US Treasury Certified
Builds Credit

Mission-Driven Lenders (CDFIs)

Mission-driven lenders – sometimes called community development financial institutions or CDFIs – are located throughout the US.

US Treasury Certified
Competitive Rates

Small Business Administration (SBA)

The U.S. Small Business Administration (SBA) is a federal agency that helps entrepreneurs manage their businesses and gain access to capital. SBA loans have some of the lowest interest rates available, and some loans are available exclusivel to small business owners.

US Treasury Certified
Competitive Rates

Online-Only Marketplace Lenders

Marketplace lenders, one of the newest types of lenders, use online platforms to connect consumers or businesses seeking to borrow money with investors willing to buy or invest in the loan. Generally, these platforms handle all underwriting and customer service interactions with the borrower.

Crowdfunding

Entrepreneurs raise funds by creating an online campaign and reaching out to the “crowd.”

Friends and Family

One viable funding option is to get your friends and family to invest in your business. Before requesting assistance, decide if you are requesting a loan from friends and family, or offering a share of your business. A loan requires repayment over time, while a direct investor takes an active role in your business decisions.

Angel Investors

Angel investors are wealthy (accredited) individuals, often-retired entrepreneurs or executives that take an interest in startup investing. They often have a particular interest, such as technology or food ventures. Angels fill a critical gap between friends and family seed funding and venture capital, and typically take an equity stake, or debt that converts to equity.

Venture Capital

Venture capital is a type of equity financing that involves giving up a portion of the ownership of business in exchange for money from investors. Venture capital (VC) firms are usually organized as partnerships. They raise money from institutional investors, such as pension funds and endowments, which the VC partners then invest in promising startups.

Angel Investors

Angel investors are wealthy (accredited) individuals, often-retired entrepreneurs or executives that take an interest in startup investing. They often have a particular interest, such as technology or food ventures. Angels fill a critical gap between friends and family seed funding and venture capital, and typically take an equity stake, or debt that converts to equity. Unlike venture capitalists, which pool money from institutions and wealthy investors into investment funds, angels invest their own money. As the field has grown, individual angels have organized into groups to share deal flow and due diligence (vetting of companies). Today there are angel networks across the country.

Angel investors will tell you that they invest in people more than ideas. So keep in mind, it’s about you, your passion and expertise. Do your homework before you approach an angel or angel group to make sure it’s a potential fit.

Pros:

  • Angels are willing to take more risk and invest at an earlier stage than other investors, such as VCs and banks
  • Hands-on approach, offering advice, mentoring and introductions that can help a young company.
  • Angels are often willing to take a chance on an entrepreneur who has passion and ability, but has not fully figured out her business plan
  • Flexible use of funds without burden of paying down debt

Cons:

  • Forfeit sole ownership, anywhere from 10% to 50% or more
  • Typically smaller amounts than venture capitalists, usually less than $1 million
  • Angels want to see an exit so they can recoup their investment, by either an IPO or acquisition.
  • Time consuming: may be difficult to find

Banks

Banks are the largest lenders to small businesses, and are probably the first place you think about when getting a loan. While banks offer some of the lowest cost loans, qualifying for one can be difficult – usually requiring a borrower to have strong personal and/or business credit scores, a personal guarantee, collateral, and healthy financials. The process to secure a bank loan can take between one and three months. Developing a successful relationship with a bank can make it easier to secure future loans and lines of credit.

Bank loans must be used for very specific business purposes. Check with your lender to ensure that you are following the guidelines.

Think a bank loan is right for you? Keep reading.

Tags: 

Crowdfunding

Crowdfunding

Crowdfunding is a new and evolving fundraising alternative that marries social media and finance. With crowdfunding, entrepreneurs reach out to the “crowd”—typically their friends, customers, supporters and social network—for funding. The idea is that lots of smaller sums of money can take the place of one or two large investors or patrons.

Entrepreneurs create a crowdfunding campaign (usually consisting of written and video content) and publish it on a crowdfunding website or platform. The campaign provides basic information explaining their venture or idea, the amount of money they are seeking, what it will be used for, and what contributors (or investors) will get in return. The best campaigns inspire people to want to donate or invest. The crowdfunding platform typically takes a fee, from 3% to 10% of the money raised. CrowdsUnite is a review site to help you compare crowdfunding platforms.

There are two main types of crowdfunding—reward and equity.

1. Reward Crowdfunding

Reward crowdfunding is the most common form, popularized by websites like Indiegogo and Kickstarter. Entrepreneurs solicit financial contributions in exchange for rewards—those rewards could include a thank you note, t-shirt or a discounted product.  Sometimes contributors are paying up front for a product that they would like to see developed—a form of pre-selling. Because there is no financial return promised, securities law do not apply. However, tax laws apply.

On Kickstarter along, more than $1 billion has been raised since 2009 for projects spanning film, music, food, gaming and technology. There are also rewards-based sites that specialize in niche markets, for example, Plum Alley for female entrepreneurs and ioby for community-based projects.

2. Investment Crowdfunding

Investment crowdfunding works the same way, except in exchange for a financial return—either a stake in the company through equity shares, interest payments on a loan, or a share of revenues. Crowdfunder, CircleUp and MicroVentures are all examples of crowdfunding platforms that use the equity model.

Because there is a promised financial return, securities laws come into play. The U.S. Securities and Exchange Commission (SEC) recently finalized rules under Title III of the Jumpstart Our Business Startups (JOBS) Act to open up opportunities for everyday Americans to participate in investment crowdfunding and invest in small businesses. Previously, investment crowdfunding was only open to accredited investors, defined as individuals with annual incomes of more than $200,000 or a net worth of more than $1 million.

Now, those earning more than $100,000 can invest up to $10,000 and those earning less than $100,000 can invest up to 5 percent of their annual income in a promising small business.

Real estate crowdfunding has become a hot crowdfunding market, as well. If your business has a real estate component – for example, a building you need to buy – sites like FundRise, RealtyMogul and Loquidity offer another option.

3. Debt Crowdfunding

Debt crowdfunding is another type of crowdfunding in which many investors give small amounts toward a larger loan that you can pay back over time. One example is Kiva, which offers interest-free loans through its platform. Like Kickstarter, Kiva requires that a loan receive full funding to disburse funds. Debt crowdfunding is similar to peer-to-peer lending platforms like Funding Circle. Another, Street Shares, connects veterans to interested investors through a peer-to-peer model. 

Are you a good candidate for crowdfunding?

Ask yourself these questions:

  • Do you have a loyal following or inspiring story?
  • Do you have a good email list and social media presence?
  • Are you looking to engage an audience of potential customers?
  • Are your sales and (target) customers confined to one state? Then intrastate crowdfunding might be a good fit.

Pros and Cons of Crowdfunding

Pros

  • Opens up new pools of capital that were previously unavailable to entrepreneurs
  • Eliminates the gatekeepers: Many companies that have been turned down by banks, VCs and other gatekeepers have successfully raised money through crowdfunding.
  • Flexibility: there’s a crowdfunding platform for every market niche and financial situation
  • Promotion: Crowdfunding is as much about marketing as it is finance. It’s an opportunity to raise awareness, promote a brand and engage new and existing customers.
  • Vet your idea: The crowd can validate your idea and provide valuable input and feedback for products or services that are under development, avoiding costly mistakes down the road.

Cons

  • Resources: Crowdfunding campaigns require a lot of time and social media savvy
  • Tax implications: crowdfunding platforms report funds raised to the IRS. While this remains something of a gray area, money raised on a rewards-based site may be considered taxable income (although that may be offset by expenses).
  • Investor relations: Many business owners may not be prepared for having 100 or 1,000 new ‘owners.’ Although their rights may be limited, these investors may nonetheless demand time and attention
  • Legal liability: Investors are allowed under the JOBS Act law to sue companies for misleading information or material omissions. It just takes just one disgruntled investor…
  • IP protection: a crowdfunding campaign can expose your great idea and intellectual property for all to see—and copy
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Friends and Family

One viable funding option is to get your friends and family to invest in your business. Before requesting assistance, decide if you are requesting a loan from friends and family, or offering a share of your business. A loan requires repayment over time, while a direct investor takes an active role in your business decisions.

If the investment is structured like a business loan, you can use existing services to formalize the agreement, streamline the payments, and make the tax returns simple. These formal agreements protect your friends’ and family’s investments in your business. It is important to develop a repayment plan that includes how you will use the funds, your business plan, how progress will be measured, and how the repayment will be made.

Funds received from friends and family can be used for any purpose. If you draw up a contract, be sure to follow any guidelines included in the document.

Mission-Driven Lenders (CDFIs)

Community Development Financial Institutions (CDFI)

A Community Development Financial Institution (CDFI) is a class of financial institution that caters to and provides assistance to underserved and low-income communities. CDFIs, which are certified by the U.S. Treasury Department, can be community banks, credit unions, nonprofit organizations, venture capital funds or loan funds. They typically raise the money they lend through grants, low-interest loans, foundations, the government or banks looking to satisfy Community Reinvestment Act requirements. CDFIs are very focused on community, targeting their funding to small businesses, microenterprises, nonprofit organizations, commercial real estate and affordable housing.

Many CDFIs have revolving loan funds that target a specific state or geographic region, making low interest loans to small business owners and micro-entrepreneurs that might not qualify for a bank loan. Like old-fashioned bankers, this is a high-touch model, and funding often comes with mentoring and other support (that’s one reason why CDFI loan portfolios held up relatively well throughout the financial crisis compared to bank portfolios).

Many CDFIs also participate in 7(a) loans through SBA’s Community Advantage Program for loans up to $250,000 and other SBA loan programs.

Some CDFIs also maintain venture capital funds that provide equity or royalty (revenue-sharing funding).

To locate a CDFI near you, visit Opportunity Finance Network’s CDFI locator tool.

Pros

  • Competitive rates
  • Good option for entrepreneurs unable to secure traditional bank loans
  • High-touch model: funding is paired with mentoring support and training
  • No predatory practices
  • Wide coverage across the U.S.

Cons

  • Small value loans may not be sufficient
  • Personal guarantee and/or collateral often required

Think a CDFI loan is right for you? Keep reading.

 

Online-Only Marketplace Lenders

Marketplace lenders, one of the newest types of lenders, use online platforms to connect consumers or businesses seeking to borrow money with investors willing to buy or invest in the loan. Generally, these platforms handle all underwriting and customer service interactions with the borrower. Once a loan is originated, a marketplace lender will typically service the loan while arranging to transfer ownership to investors. Marketplace lending platforms often market both new loans and loans to refinance or consolidate existing debt.

Marketplace lenders can provide loans even if you don’t have perfect credit. But these loans may have very high interest rates and expensive fees (learn more about loan types). While marketplace lenders are required to follow federal and state consumer financial protection laws, it is important to keep in mind that they generally are not regulated by the government in the way banks are.

Most marketplace lenders allow you to use your loan funds for any business purpose. Check your loan terms for more information on how you can use your funds.

Think a market place loan is right for you? Keep reading.

Small Business Administration (SBA)

The U.S. Small Business Administration (SBA) is a federal agency that helps entrepreneurs manage their businesses and gain access to capital. SBA loans have some of the lowest interest rates available, and some loans are available exclusively to small business owners. The agency doesn’t lend the money directly to entrepreneurs to start or grow a business, but sets guidelines for loans made by its partners (lenders, community development organizations and micro-lending institutions). The SBA guarantees the repayments on these loans to minimize the risk for its lending partners. SBA Linc can connect you with SBA approved lenders in your state.

The SBA pre-screens loan applicants with FICO’s SBSS score, a small business credit score. While most businesses, even younger ones, can qualify for an SBA loan – having a limited business history makes it more difficult. SBA offers a variety of loan programs for very specific purposes. If you apply for an SBA loan, check with your local approved lender about how you can use these funds.

Think an SBA loan is right for you? Keep reading. 

Venture Capital

Like angel investing, venture capital is a type of equity financing that involves giving up a portion of the ownership of business in exchange for money from investors. Venture capital (VC) firms are usually organized as partnerships. They raise money from institutional investors, such as pension funds and endowments, which the VC partners then invest in promising startups. This is a step up from angel investing. VCs can now be found in many areas of the country and a growing number of corporations have created venture investment arms as well, including Google, Dell, General Mills and Walgreens. Some of the biggest names in tech were backed by venture capital, including Google, Facebook and Uber. But overall, a tiny fraction—less than 1%—of all startups receive venture funding.

Although VCs are also focused on early stage companies, they typically are interested in a rarified breed of company—ones with billion-dollar market prospects and the potential to return 10 times or more the initial investment. Here’s a tip: don’t waste your time on venture capital unless you’re going for the big leagues.

Pros:

  • A venture capital investor can lend prestige and credibility to a young venture
  • Hands-on approach, offering advice, contacts, mentoring and introductions that can help a young company.
  • VCs invest large amounts of money—$1 million or more —which is good for capital-intensive companies
  • Flexible use of funds without burden of paying down debt

Cons:

  • Forfeit sole ownership
  • VCs look for an “exit” so they can recoup their investment, by an IPO or acquisition within 5 to 10 years
  • Time consuming: may be difficult to find
  • VCs are focused on high growth opportunities and you may be pushed to grow faster than you like
  • The personal stakes are high. If founders do not execute according to plan, they may find themselves out of a job.

Credit Unions

Big banks approve just 2 out of 10 small business loan requests. Small businesses have better luck with small banks (under $10 billion in assets) including credit unions.  Credit unions have traditionally been key allies for small business, making a disproportionate share of small business loans. In general, working with small businesses is a main focus of community banks. They have a deep understanding of the local community and take that into account when considering loan applications from local businesses.

Credit unions are nonprofit financial cooperatives owned by their members/depositors. They offer similar services as banks, including small business loans, but often have a “community” focus or mission. Their earnings are returned to their members in the form of lower loan rates, higher interest on deposits and lower fees. Credit unions are currently restricted to lending up to 12.5% of their assets.

Pros

  • Low interest rates, typically between 6% and 10%
  • Long loan terms (multi-year)
  • Commitment to local community
  • Great customer service, personal touch

Cons

  • Long application times
  • High hurdles, i.e. in business for 2+ years, good credit, collateral requirements
  • Tightly regulated – limited flexibility
  • Less range of products and technology than big banks
  • Consolidation of community banks and credit unions

Resources:

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Which Loan is Right for your Small Business?

Before talking to a lender about a loan for your small business, you should understand the basics of your funding options. Having a better understanding of your options at the outset can save you a lot of time, energy and money. We’ve identified the most popular types of loans for small business owners as well as their features and things to consider before applying for funds.

Some information on this page is adapted from content that originally appeared on Nav.com, a Venturize supporter.

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Traditional Bank Loans

Banks are the largest small business lenders and probably the first place you think about when getting a loan. They offer some of the lowest cost loans, but qualifying can be difficult; about 72% of small business owners who apply get rejected. Banks usually require strong personal and/or business credit scores, a personal guarantee, collateral, and healthy financials. Applying also takes significant effort and time — completing the process can take from one to three months.

Credit Score Requirements: 
High
Loan Wait Times: 
Varies
Interest Rates: 
Low
Quick Overview
Features: 
  • Very low, fixed interest rates
  • Predictable monthly payments
  • Helps build business credit
  • Professional banker relationship
  • Available for many uses
Things to consider: 
  • Extensive paperwork
  • Longer wait time
  • Requires strong credit
  • Usually requires collateral

Small Business Administration (SBA) Loans

The U.S. Small Business Administration (SBA) is a federal agency that helps entrepreneurs manage their businesses and gain access to capital. SBA loans have some of the lowest interest rates available, but usually require strong personal and/or business credit.

Credit Score Requirements: 
Good
Interest Rates: 
Low
Quick Overview
Features: 
  • Lowest down payments
  • Longest payment terms
  • Reasonable interest rates
  • Suitable for wide range of business purposes
  • Multiple programs available
Things to consider: 
  • Lengthy paperwork
  • Longer approval times
  • May require collateral
  • Strict acceptance criteria
  • May be restricted from taking on another loan

Mission-Driven Loans

Mission-driven loans are offered by institutions committed to supporting job-creating enterprises in underbanked and low-income communities where other financial opportunities may be limited or include rates that are not favorable to borrower.

Credit Score Requirements: 
Good
Interest Rates: 
Varies
Quick Overview
Features: 
  • Lower credit scores may be accepted
  • Include fixed- or adjustable- rate loans
  • Helps build business credit
  • May include mentoring from lending expert
Things to consider: 
  • Longer approval times
  • Extensive paperwork
  • May require collateral
  • Repayment terms vary

Microloans

Microloans are available for small business owners or startups that have a thin credit file or can’t secure funds through a traditional bank. Microlenders are non-profit organizations that offer smaller loan sizes, which max out at $50,000 but tend to average much less than that. They charge slightly higher rates than big banks, but have less stringent underwriting criteria. Microlenders will typically mentor you through the application process, which is a big plus. Their goal is to help you build your credit and financial history, so that you can eventually qualify for bank funding.

Credit Score Requirements: 
Good
Loan Wait Times: 
High
Interest Rates: 
Low
Quick Overview
Features: 
  • Reasonable interest rates (8-18%)
  • Favorable repayment terms
  • Good way to establish business credit
  • Available for many uses
  • Collateral usually not required
Things to consider: 
  • Limited to businesses with 5 or fewer employees
  • Small loan amounts, average $6000
  • Extensive paperwork required
  • Past credit issues can still disqualify you
  • You may have to take a business training class

Personal Sources

Personal funding can be a viable option for your small business needs, but doing it successfully requires you to thoroughly calculate all of your costs, so that you don’t run out of money before your business can support itself. Your goal should be to finance your business so it can stand on its own, without co-mingling personal assets and credit. This will be important as you provide financial reporting to tax agencies, potential lenders, and other entities.

Credit Score Requirements: 
Low
Quick Overview
Features: 
  • Low credit score requirements

Online Marketplace Loans

Non-bank loans have become an increasingly popular alternative for borrowers who have been denied a loan by the bank, or don’t have the time to go through a lengthy application process. A new generation of online-only “marketplace loans” is designed to appeal to business owners who have lower credit scores, or who have been in business for a short time. These loans tend to have much higher interest rates than bank or SBA loans, and to have more lax credit score criteria. Typically, these loans are for 1 – 5 years and come with a fixed monthly payment. Online marketplace loans can be used for virtually any business need.

Credit Score Requirements: 
Low
Loan Wait Times: 
Low
Quick Overview
Features: 
  • Quick turnaround time (compared to banks)
  • Less effort and documentation needed
  • Fixed, predictable monthly payments
  • Helps improve business credit score (with on-time payments)
  • Available for many uses
Things to consider: 
  • Higher interest rates than bank loans
  • Little to no mentorship
  • May have pre-payment penalty
  • May require collateral
  • Typically requires two years of business history

Merchant Cash Advance

Merchant Cash Advances (MCAs) are a pricey option that’s available to businesses that have credit or debit card sales. MCAs are probably the most expensive borrowing option, with APRs between 25% – 350%. Usually, they require a minimum daily payment regardless of your sales. Merchant cash advances can usually be approved in a day or two—with very little paperwork. After approval, the loan is repaid with a portion of your future credit card sales each day. Some online only marketplace lenders provide merchant cash advances.

Credit Score Requirements: 
Low
Loan Wait Times: 
Low
Interest Rates: 
High
Quick Overview
Features: 
  • Fast access to cash
  • Flexible repayment terms
  • Strong credit not required
  • You choose how to use funds
  • No collateral required
Things to consider: 
  • Very, very expensive (70-200% APR)
  • Minimum daily payments hurt cash flow
  • Doesn’t help business credit
  • My lock-in merchant processor
  • Must accept credit cards.

Cash Flow Loans

With cash flow loans a lender provides you funds and accepts your expected future cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future, and giving the lender the rights to a predetermined amount of these receivables. These loans are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role than with other loans. After you apply, the lender will inspect your account’s cash flow and make a quick (if not instant) decision on whether or not to offer you a loan, and at what interest rate.

Credit Score Requirements: 
Low
Loan Wait Times: 
Low
Interest Rates: 
High
Quick Overview
Features: 
  • Fast access to money (usually within a week)
  • Poor credit scores may be ok
  • Less documentation needed
  • No physical collateral required
  • Can improve your credit score
Things to consider: 
  • High interest rates (20-90%)
  • Lender has direct access to bank account
  • May have pre-payment penalty
  • Typically requires 2 years of business history

Business Credit Card

Though not necessarily a “loan” in the traditional sense, a business credit card can help you obtain financing without the hefty process of loan approval.

Business credit cards are a popular choice among entrepreneurs who have limited business history and don’t qualify for lower-cost financing, such as bank lines of credit. 65% of small businesses use them on a regular basis. Business credit cards, like personal credit cards, provide a revolving line of credit that you use for business expenses. A business credit card should not be tied to your personal credit – because maxing out personal credit cards for business expenses can kill your personal credit scores. But if you pay your bills on time, business credit cards can actually help build your business credit profile. Most major credit card companies provide business credit card options.

Credit Score Requirements: 
Good
Loan Wait Times: 
Low
Interest Rates: 
High
Quick Overview
Features: 
  • Less stringent approval criteria
  • Quick turnaround time
  • Rewards like cash back or 0% intro. interest rate
  • Interest paid may be tax deductible (unlike personal cards)
  • May help build business credit score
  • Can use for any business need
  • No collateral required
Things to consider: 
  • Higher interest rates than bank credit lines (13% – 25%)
  • Variable interest rates could move higher
  • May have annual fee
  • Limited funding amount (max usually $20,000)

Traditional Bank Loans

Banks are the largest small business lenders and probably the first place you think about when getting a loan. They offer some of the lowest cost loans, but qualifying can be difficult; about 72% of small business owners who apply get rejected. Banks usually require strong personal and/or business credit scores, a personal guarantee, collateral, and healthy financials. Applying also takes significant effort and time — completing the process can take from one to three months.

Traditional Bank Loans: Covenants
Before taking a traditional bank loan, it is important to clearly understand any covenants associated with the loan and the collateral required to secure it. Covenants are clauses in lending contracts that may restrict or limit you as the borrower from using the money for certain things, or require you to adhere to particular business performance requirements. The level of constraint or number of requirements is primarily based on the risk of the borrower, as determined by personal or business credit score, payment histories, and overall business financials.

Covenants protect a lender by ensuring that a loan will be paid back, no matter the circumstances of the business. A thorough understanding of any covenants attached to a loan can help you avoid violating a covenant and facing the severe consequences that can result. For instance, using your loan for anything outside of the agreed-upon terms, even in emergency business situations, can constitute breach of your loan agreement, as can taking on new loans or accepting funding without the bank’s permission.

The consequences of violating bank covenants, can include the bank calling back the note, pulling your credit line, and/or forcing you to pay the entire amount back within a shorter time period (sometimes within as little as 30 days). A bank may go after your business and even your personal assets to repay a loan (since personal guarantees are often included in loan terms).

Before signing your agreement:

  • Carefully read your loan agreement
  • Ask for clarification on anything you do not understand
  • Consult a trusted advisor such as your CPA or attorney
  • Confirm whether adhering to any covenants is realistic
  • Make sure you know if you are signing a personal guarantee
  • Ask the right questions about your loan agreement
Features: 
  • Very low, fixed interest rates
  • Predictable monthly payments
  • Helps build business credit
  • Professional banker relationship
  • Available for many uses
Things to consider: 
  • Extensive paperwork
  • Longer wait time
  • Requires strong credit
  • Usually requires collateral
Credit Score Requirements: 
High
Annual Interest Rates: 
5 – 10%
Turnaround Time: 
2 – 4 months
Tags: 
Loan range: 
$250 000-$5 000 000

Small Business Administration (SBA) Loans

The U.S. Small Business Administration (SBA) is a federal agency that helps entrepreneurs manage their businesses and gain access to capital. SBA loans have some of the lowest interest rates available, but usually require strong personal and/or business credit. The SBA pre-screens loan applicants with FICO’s SBSS score, a small business credit score. While most businesses, even younger ones, can qualify for an SBA loan, having a limited business history makes it more difficult.

7(a) loans, the most popular loan provided by the SBA, are available to new and established businesses with a FICO SBSS Score of 140 or above.

SBA Community Advantage Loans are a type of SBA 7(a) loan designed to help provide affordable financing and technical assistance to underserved businesses that may not qualify for traditional financing. These loans are provided by many mission-driven lenders and do not have some requirements of more traditional financing products.

504/CDC(Certified Development Company) Loans provide long term financing for businesses to purchase real estate or high-cost assets they need to run their business.

SBA Microloans are small loans of up to $50,000, available to new and established businesses through non-profit community lenders.

SBA 7(A)
7(a) loans are negotiated between a borrower and SBA-approved lender. The maximum loan amount is $5 million.

SBA 504
Maximum loan amounts are determined by how funds will be used and based on which business goal they support.

For more information about the SBA (7)a and 504 loans, as well as other loans offered by the SBA, visit the SBA site.

Features: 
  • Lowest down payments
  • Longest payment terms
  • Reasonable interest rates
  • Suitable for wide range of business purposes
  • Multiple programs available
Things to consider: 
  • Lengthy paperwork
  • Longer approval times
  • May require collateral
  • Strict acceptance criteria
  • May be restricted from taking on another loan
Credit Score Requirements: 
Good
Turnaround Time: 
30 days – 6 months
Loan range: 
$50 000-$5 000 000

Mission-Driven Loans

Mission-driven loans are offered by institutions committed to supporting job-creating enterprises in underbanked and low-income communities where other financial opportunities may be limited or include rates that are not favorable to the borrower. While these loans may be similar in structure to loans offered by other institutions, mission-driven lenders sometimes mentor applicants through the lending process, often with the goal of helping small business owners with thin credit files eventually qualify for bank funding. The loans provided by mission-driven lenders (depending on institution) may be fixed-rate or adjustable-rate, which gives borrowers more options. (Community Development Financial Institutions (CDFIs) are a type of mission-driven lender that is certified by the US Department of Treasury’s CDFI Fund).

Features: 
  • Lower credit scores may be accepted
  • Include fixed- or adjustable- rate loans
  • Helps build business credit
  • May include mentoring from lending expert
Things to consider: 
  • Longer approval times
  • Extensive paperwork
  • May require collateral
  • Repayment terms vary
Credit Score Requirements: 
Good
Annual Interest Rates: 
6% – 7%
Turnaround Time: 
6 weeks
Loan range: 
$250-$500 000

Microloans

Microloans are available for small business owners or startups that have a thin credit file or can’t secure funds through a traditional bank. Microlenders are non-profit organizations that offer smaller loan sizes, which max out at $50,000 but tend to average much less than that. They charge slightly higher interest ratesthan big banks, but have less stringent underwriting criteria. Microlenders will typically mentor you through the application process, which is a big plus. Their goal is to help you build your credit and financial history, so that you can eventually qualify for bank funding.

Features: 
  • Reasonable interest rates (8-18%)
  • Favorable repayment terms
  • Good way to establish business credit
  • Available for many uses
  • Collateral usually not required
Things to consider: 
  • Limited to businesses with 5 or fewer employees
  • Small loan amounts, average $6000
  • Extensive paperwork required
  • Past credit issues can still disqualify you
  • You may have to take a business training class
Credit Score Requirements: 
Good
Annual Interest Rates: 
8% – 18%
Turnaround Time: 
1 – 3+ months
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Loan range: 
$500-$50 000

Personal Sources

Personal funding can be a viable option for your small business needs, but doing it successfully requires you to thoroughly calculate all of your costs, so that you don’t run out of money before your business can support itself. Your goal should be to finance your business so it can stand on its own, without co-mingling personal assets and credit. This will be important as you provide financial reporting to tax agencies, potential lenders, and other entities. There are a few different options when it comes to personal funding:

  • Personal Credit Cards: if you can’t secure a business credit card, a personal credit card with a reasonably high limit can help you get those first few purchases and your business under way. Keep a close eye on your credit utilization and pay your bills on time, because making business expenses on personal credit cards can ruin your personal credit history.
  • Savings/Home Equity: Dipping into your savings is an even riskier business, but if you have a good amount set aside this could be the cheapest option for you. Borrowing against your home can be a cheap option as well.
  • 401K/ IRA Savings: If you plan to incorporate your business, you can use your retirement plan to invest in the company. Keep in mind that it may not be wise to bet your whole retirement savings on your brand new business.

If you plan to ask your friends and family for funds, take time to think through what you’re asking for, and how you formalize this agreement.

Features: 
  • Low credit score requirements
Credit Score Requirements: 
Low
Annual Interest Rates: 
Depends on source
Turnaround Time: 
Depends on source
Loan range: 
$200-$2 000 000

Online Marketplace Loans

Non-bank loans have become an increasingly popular alternative for borrowers who have been denied a loan by the bank, or don’t have the time to go through a lengthy application process. A new generation of online-only “marketplace loans” is designed to appeal to business owners who have lower credit scores, or who have been in business for a short time. These loans tend to have much higher interest rates than bank or SBA loans, and to have more lax credit score criteria. Typically, these loans are for 1 – 5 years and come with a fixed monthly payment. Online marketplace loans can be used for virtually any business need.

Features: 
  • Quick turnaround time (compared to banks)
  • Less effort and documentation needed
  • Fixed, predictable monthly payments
  • Helps improve business credit score (with on-time payments)
  • Available for many uses
Things to consider: 
  • Higher interest rates than bank loans
  • Little to no mentorship
  • May have pre-payment penalty
  • May require collateral
  • Typically requires two years of business history
Credit Score Requirements: 
Low
Annual Interest Rates: 
7% – 30%
Turnaround Time: 
2 – 7 days
Loan range: 
$25 000-$500 000
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Merchant Cash Advance

Merchant Cash Advances (MCAs) are a pricey option that’s available to businesses that have credit or debit card sales. MCAs are probably the most expensive borrowing option, with APRs between 25% – 350%. Usually, they require a minimum daily payment regardless of your sales. Merchant cash advances can usually be approved in a day or two—with very little paperwork. After approval, the loan is repaid with a portion of your future credit card sales each day. Some online only marketplace lenders provide merchant cash advances.

You’ll pay for this convenience in very high interest rates. Merchant cash advances can be a quick way to get the funds you need without collateral (even if you have bad credit), if you are desperate or want to take advantage of a short-term opportunity that requires fast cash. However, relying on merchant cash advances can make it very difficult to manage future cash flow.

Features: 
  • Fast access to cash
  • Flexible repayment terms
  • Strong credit not required
  • You choose how to use funds
  • No collateral required
Things to consider: 
  • Very, very expensive (70-200% APR)
  • Minimum daily payments hurt cash flow
  • Doesn’t help business credit
  • My lock-in merchant processor
  • Must accept credit cards.
Credit Score Requirements: 
Low
Annual Interest Rates: 
15% – 150%
Turnaround Time: 
1 – 7 days
Loan range: 
$200-$250 000

Cash Flow Loans

With cash flow loans a lender provides you funds and accepts your expected future cash flow as collateral for the loan. You’re essentially borrowing from cash that you expect to receive in the future, and giving the lender the rights to a predetermined amount of these receivables. These loans are primarily used for working capital or take advantage of short-term ROI opportunities. Your credit scores will usually be checked, but they play less of a role than with other loans. After you apply, the lender will inspect your account’s cash flow and make a quick (if not instant) decision on whether or not to offer you a loan, and at what interest rate.

While turnaround time is fast, interest rates on these loans are higher than for other forms of financing. Since cash flow loans aren’t extended based on information beyond your account history, and don’t require collateral (though they do require a personal guarantee in most cases), they are inherently riskier loans for lenders, who offset this risk by charging high interest rates. Some online-only marketplace lenders provide cash flow loans.

You should also be aware that many cash flow lenders also charge a very steep prepayment penalty. This means that paying back the loan early doesn’t help you because the payback amount is fixed. They don’t use an APR or amortization.

Features: 
  • Fast access to money (usually within a week)
  • Poor credit scores may be ok
  • Less documentation needed
  • No physical collateral required
  • Can improve your credit score
Things to consider: 
  • High interest rates (20-90%)
  • Lender has direct access to bank account
  • May have pre-payment penalty
  • Typically requires 2 years of business history
Credit Score Requirements: 
Low
Annual Interest Rates: 
25% – 90%
Turnaround Time: 
Minutes – 3 days
Loan range: 
$200-$100 000

Business Credit Card

Though not necessarily a “loan” in the traditional sense, a business credit card can help you obtain financing without the hefty process of loan approval.

Business credit cards are a popular choice among entrepreneurs who have limited business history and don’t qualify for lower-cost financing, such as bank lines of credit. 65% of small businesses use them on a regular basis. Business credit cards, like personal credit cards, provide a revolving line of credit that you use for business expenses. A business credit card should not be tied to your personal credit – because maxing out personal credit cards for business expenses can kill your personal credit scores. But if you pay your bills on time, business credit cards can actually help build your business credit profile. Most major credit card companies provide business credit card options.

The required credit score will vary based on the company extending the credit card, so you may be able to find a business credit card that will work with your current credit situation. If you are not in position to qualify for a business credit card, you can look into getting a secured credit card that requires a deposit or collateral up front. In most cases, this deposit must be made in cash, although some lenders will accept collateral in the form of homes or cars. A secured credit card or secured business credit card can be a valuable tool to build and repair your credit.

Features: 
  • Less stringent approval criteria
  • Quick turnaround time
  • Rewards like cash back or 0% intro. interest rate
  • Interest paid may be tax deductible (unlike personal cards)
  • May help build business credit score
  • Can use for any business need
  • No collateral required
Things to consider: 
  • Higher interest rates than bank credit lines (13% – 25%)
  • Variable interest rates could move higher
  • May have annual fee
  • Limited funding amount (max usually $20,000)
Credit Score Requirements: 
Good
Annual Interest Rates: 
13% – 25 %
Turnaround Time: 
1 – 3 weeks
Loan range: 
$250-$25 000