How can you find the best funding for your small business? Well, it depends! You have to factor in how you’ll use the money, what stage your business is in, and even your industry to find the right funding for you. Not sure where to start? This guide will give you an overview of what to consider to determine the best funding options to grow your small business.
Top funding options for your new business
In the startup stage, your capital will most likely come from equity sources. Equity is a long-term investment in your business that doesn’t carry interest and generally doesn’t have a specific repayment schedule. Equity funds usually have few restrictions on how they can be used. They include:
- Gifts or loans from family or friends
- Crowdfunding
- Personal savings
- Home equity line of credit
- Credit cards
- Sweat equity
- Bootstrapping
- Angel investors or venture capitalists
Pros: ”Risk-free” capital due to flexible repayment schedule, flexible uses, and ability to plan for long term growth.
Cons: Pressure on your personal savings, potentially risky to personal relationships, and if you’re using angel investors or venture capitalists, you lose some ownership of your business.
Best funding options for small businesses in the growth stage
Once your business is established, you’ll need capital to grow, expand to a second location, or to buy another business. If you’re not able to qualify for a traditional bank loan, you’ve still got responsible options.
There are alternative community lenders that can help you find the right funding option for your small business. These include Community Development Financial Institutions (CDFIs) and Certified Development Companies (CDCs), which are non-profit lenders approved by the U.S. Small Business Administration (SBA) to offer their loan options. Some online lenders, traditional banks, and credit unions also offer SBA loan options.
These lenders can offer loans to higher-risk small businesses because the SBA provides a guaranty in case you can’t repay the loan. You can also use SBA loans when you’re in the early stages of running your business because lenders consider both projections, cashflow, and actual financial results. Some alternative community lenders to consider are:
- Microlenders
- SBA lenders
- CDFIs
- Credit unions
- Other community banks
Pros: Flexible terms tailored to meet small business needs, low to average interest rates, longer repayment terms, and advisory services.
Cons: Depending on the lender, a personal guarantee may be required.
Be sure to watch out for predatory lenders that come with high interest rates, high fees, and difficult repayment terms, and are usually misleading or unclear in their communications. Predatory lenders may offer loans for early-stage small businesses that need quick access to capital, but because they aren’t regulated like traditional institutions, they don’t play by the same rules as responsible lenders. You might run into a predatory lender when you explore:
- Online lenders
- Factoring companies
- Merchant cash advance lenders
Pros: Flexible requirements, faster turnaround and approval, and less documentation.
Cons: High interest rates, expensive fees, shorter repayment terms that can be as often as daily or weekly, unclear costs and fees, and depending on the lender, a personal guarantee may be required.
You can determine the true cost of different loan types by calculating the annual percentage rate (APR) for each option. This will give you an apples-to-apples comparison of your options.
Funding options for growing established businesses
Once your business is stable and you reach the expansion phase, your small business is likely on solid ground with predictable revenues and cash flow. This means you’ll be able to qualify for traditional bank loans. You can take advantage of your business banking relationship by applying for loans with affordable interest rates and terms. Consider refinancing any existing higher interest debt or get ready to fund your next opportunity. Traditional bank loans include:
- Lines of credit
- Term loans
- Asset-based loans
- Construction loans
Pros: Market interest rates, varying repayment terms, and lending is based on cash flow or collateral.
Cons: Requires higher personal credit scores, historical cash flow, and personal guarantee is required.
Pursuit can support your business at any stage
If you are a small business owner who needs help navigating funding sources, we’re here to help you. We can walk you through the various loan options available to you based on your business needs and stage of growth.
We’ll help you find the right loan for your business with more than 15 loans and a line of credit, insightful information and resources, and business advisory services for small businesses in New York, New Jersey, Connecticut, Pennsylvania, Illinois, and Delaware.
Contact us today to learn more about ways we can help!
