Small Business Funding & Borrowing Overview
From credit cards and loans to equity and angel investors, small business owners have a number of options to consider when it comes to company funding. But despite the overall number of viable money sources, small business owners typically have a tough time coming up with the capital they need. That’s due to a combination of the long odds facing start-ups and the cautious post-recession lending landscape.
Nevertheless, it’s important that you’re aware of all available funding options so you leave no stone unturned in your pursuit of the capital needed to grow your business. We put together this guide with that in mind, analyzing funding and borrowing options, highlighting approval criteria and offering tips for how to save money while providing your company with the liquidity it needs. So, read on to learn more.
As we know, small business funding can come in many forms. The biggest differentiator between these types of funding is whether or not they require you to borrow money. In the table below, we examined both types of funding structures based on the amount of money they offer as well as their repayment terms, fees and approval criteria.
Keep in mind that the figures presented below represent market averages. The terms you qualify for may differ based on your disposable income and the particulars of your credit history.
|Funding Option||Amount Available||Repayment Terms||Fees||Approval Difficulty|
|Business Credit Card||$1,000 - $50,000||Must Repay ~3% of Balance Each Month
8.24% – 26.99% APR (Average: 15.83%)
|$0 – $495 Annual Fee
|Business Line of Credit||$1,000 - $2,000,000||Must Repay 0.5% - 1.5% of Amount Spent Each Month
5% – 13% APR
|$0 - $175 Annual Fee||Moderate|
|Small Business Loan||$10,000 - $1,000,000(Median: $135,000)||Up To 7 Years
4.25% - 18.25% APR (Average: 7.73% (under $100K); 6.99% (over $100K)
|0% – 0.5% of Amount Borrowed (one-time)||Difficult|
|SBA Loan*||$5,000 - $5,000,000
|Up To 25 Years
(real estate loans)
Up To 10 Years (equipment loans)
Up To 7 Years (working capital)
Maximum Rates: 5.50% – 8.00%
|0% - 3.75% of Amount Borrowed
|Peer-to-Peer Lending||Average: $16,200||Equal Monthly Payments Over 3 Or 5 Years
7% – 35.36% APR (Average: 15%)
|1% - 5% of Amount Borrowed
|Crowdfunding||Average: $7,000||Repayment Not Required
May Necessitate Fulfillment of Purchase Orders Tied To Funding
|3.5% - 5% of Amounts Raised
2.5% - 5% Transaction Fee
|Online-Only Lenders||$2,000 - $250,000||Equal Monthly Payments Over 1 – 6 Months
Usually no APR but fees that equate to a 24% rate on average.
|1% - 38% of Amount Borrowed||Moderate|
|Invoice Financing||85% of Invoice Amount Advanced In Cash
Remaining 15% Paid Out Later
|Borrowers Put Up Payment Invoices, Accounts Receivable or Credit Card Receipts as Collateral.
No APR in most cases, but fees equating to rates as high as 50% may be assessed.
3% Processing Fee1% Weekly Charge While Invoice Outstanding
|Equity Investment:||Depends On Negotiated Terms||Funding Provided For Partial Ownership||Legal Fees**||Difficult|
|Small Business Grants:||>Amounts Vary Widely
Average: $624,807 (Small Business Research Innovation Program)
|Repayment Not Required||Application Fees May Apply||Very Difficult|
*Variations exist between the SBA’s different loan programs.
**Investment agreements should be reviewed by the attorneys of both parties prior to signature.
Sources: U.S. Small Business Administration, Fundera, WalletHub Data, Go Banking Rates, Major Lender Websites
Just remember that simply because a funding method doesn’t require the incursion of debt, that doesn’t mean it will necessarily be your least expensive option. If your company is poised to one day be valuable enough, then sacrificed equity will greatly outweigh finances charges. That is, if your business can survive until then.
There’s really nothing stopping you from using consumer debts to pay business bills. There’s no industry-wide rule forbidding the practice, provided that you’re accounting checks out at the end of the day. So, if you can get better terms from a personal loan or line of credit than the available business-branded offers provide, take advantage of the savings.
In the case of credit cards, it’s actually important that you do use a consumer account for financing purposes. Small business credit cards are not covered by the CARD Act, which means they lack important consumer protections. For example, issuers can arbitrarily increase the cost of whatever balance you carry on a business credit card whenever they want to. If you use a personal credit card, they have to wait until you become at least 60 days delinquent on payment.
With that being said, here’s a quick breakdown of the personal lending vehicles that could be of use:
- Personal Credit Card: Spending limits on personal credit cards are about 70% lower on average than those on business cards. However, personal cards are also more accessible given their lack of corporate registration information, and they provide valuable legal protections. There’s no liability tradeoff to using a general-consumer credit card either.
- Personal Line of Credit: You can get up to 67% more spending power with a personal line of credit than with a personal credit card, according to WalletHub calculations. Lines of credit are especially useful when you need cash.
- Personal Loan: Little difference exists between business loans and personal loans, aside from their names and overall availability. The small business lending market has dried up in recent years, so if you can get better terms from a consumer account, making things personal is an easy way to save.Of course, the one thing that could trip you up is if a bank inquires about the intended purpose of the loan. If your plans sound a bit too corporate, you might get redirected to the business loan department.
- Home Equity Loan: As the most valuable asset that most people own, our homes can be a great source of needed capital. Borrowing against this collateral, whether through a home equity loan or a home equity line of credit (HELOC), should also enable you to get better terms on what you borrow. Don’t forget that this puts your home at risk of foreclosure if you aren’t able to repay amounts owed.
More information about business financing options can be found in our In-Depth Comparison Of Credit Cards & Credit Lines.
Success in borrowing is typically dependent on the same factors as success in business. You need to be thorough, organized, patient and persuasive. Here are some specific tips for maximizing your odds of approval:
- Maximize Your Personal Credit Standing: Since your personal credit standing is usually given more weight in lending decisions than your business credit, it makes sense to give the former the bulk of your preparatory attention.The most important things to do are: 1) make sure you have an open credit card, whose bill you pay on time every month; and 2) pull your major credit reports to see where you stand, protest errors and check for fraud.
- Try To Work With Your Personal Lender: Oftentimes, it can be easier to get a loan from a bank or credit union with which you have an existing relationship. They’ll know you better than a financial institution that you’ve never patroned, and if a certain level of trust has been established, they may provide better rates or even approval if you don’t exactly meet the lender’s underwriting requirements.
- Establish A Relationship With A Community Bank: While they still are very selective about business lending, community banks are much more likely to lend to small businesses than big commercial banks are. Start by moving your business and personal bank accounts to a nearby community bank. Then introduce yourself to the bank executives, who are generally very approachable and interested in learning about other local businesses. Having that relationship in place will make them more likely to listen when you return to talk about a loan.
- Shop Around & Carefully Compare Terms: Information is key to financial shopping. Knowing exactly what’s available as well as the approval requirements of each option will enable you to hone in on the best possible deals for people in your exact financial situation.
- Don’t Bite Off More Than You Can Chew: Taking on too much debt is both costly and extremely dangerous to the future of your business. And, borrowing more than you need now with the idea that might need it later is risky, as money in the bank inevitably leads to new ideas for how to spend it. Of course, this sort of over-borrowing is more common with credit cards than small business loans, given the former’s recent scarcity.
- Avoid Getting Desperate: If you’re striking out with the major sources of small business funding, it’s important that you avoid the temptation to settle for a bad deal. You’ll only end up wasting money, perhaps even falling into a dangerous debt cycle in you get involved with payday lenders (a terrible idea!).The best thing to do, both for your business and you personally, is take the opportunity to improve your credit standing, pay off amounts owed and get the rest of your financial house in order. In the meantime, you can work your tail off to organically expand your business.
- Recognize The Virtue In Bootstrapping: Staying lean as long as possible pays a number of important dividends. Not only does it save you a great deal of money, but it also forces you to be strategically creative in your allocation of limited resources.“An abundance of capital tends to dull the mind,” says Angelo Santinelli, adjunct professor of Entrepreneurship at Babson College. “There is the tendency to hire too fast, pursue too many un-validated ideas, and spend on non-strategic elements of the business. Using one’s own capital first and essentially being capital constrained in the early going is not necessarily a bad thing. There is a natural need to focus more narrowly, develop and test hypothesis, harness resources intelligently before building the product.”
Ask The Experts: Breaking Down Business Borrowing Trends
We took a deeper look at the small business lending landscape by surveying a panel of industry experts on current loan availability as well as the future of the market. You can check out their bios and responses to the following questions below.
- Why has small business lending dried up in recent years, when start-ups and other small firms have helped lead the economic recovery?
- What is your forecast for the small business lending market over the next five years?
- What sectors are expected to add the most new small businesses in the next five years?
Image: Sergey Nivens / Shutterstock
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