Linda Jenkins, February 22 2016
As a small business owner, there will be many times during the life-cycle of your business that you will require an infusion of money. If you have been running your business for some time, you probably know that trying to find financing through a bank is very difficult. In fact, only 30% of business owners successfully find funding this way. So, what are the other opportunities available to you?
This depends on what stage of business you are currently in, since many lenders require a financial history.
Here are some financing alternatives listed by stage:
Early Stage / Startup
One Spark - a unique in-person crowdfunding platform
SCORE - check this resource for mentors that can match your company to funding
ZimpleMoney - formalize lending from friends & family
One to Five Years
Angel Investors - Find investors through the Angel Capital Association.
Kabbage Working Capital - up to $100,000 for your online business
Bootstrapping - invest profits back into your business
Crowdfunding & Peer-to-Peer Lending - Learn More
All of the above, plus:
Merchant Advances & Purchase Order Financing - Learn More
Traditional Banks - loans & lines of credit
As you can see, the longer you have successfully run your business, the more opportunities you will have available to you. Once you find a lending resource, be sure you are aware of exactly what fees and interest rates will affect your loan over time (or, in the case of equity financing, how much ownership you are giving up and the implied valuation of your company). If possible, consult with a Certified Public Accountant and Attorney before signing any financial agreements.
Linda Jenkins, August 10 2015
The following article provides insight into four lending and financing options for today's small business owner
. The article covers receivables factoring, purchase order financing, equipment leasing and social lending as a means to combat the high cost of financing.
One of the major causes of high financing costs pertains to how long it takes companies to collect on invoices
. With an economy slowed down by decreased demand, customer bankruptcies and the overall uncertainty of global markets, small businesses are struggling with poor cash positions and mounting bills. Therefore, given the severity of the situation, can anything be done? More importantly, are there any options to financing for today's small business owner other than dealing with banks and credit unions? In fact, there are! Today's businesses need not accept the status quo. There are several asset-based lending options that allow small businesses to assume a more dominant role in financing their operations.
1. What is accounts receivable factoring / merchant advance?
Every receivable has a value to a company. Unfortunately, that value depreciates over time. The longer it takes customers to pay, the bigger the impact on gross profit. A company's cost of capital is offset by using receivable factoring because it allows companies to do away with delayed customer payments with immediate, upfront cash advances based on the value of the receivable. Companies no longer have to lose money waiting for customers to pay. Instead, the financing company advances capital based on the invoice's value. See 1stCommercialCredit.com
2. What is purchase order financing?
Another asset-based lending solution is that of purchase order financing, which is similar to factoring with the exception that the company is able to secure capital upon receipt of a customer's order. This capital can then be used to finance the order, pay vendors and creditors and move forward with order fulfillment. Again, once the customer pays the invoice, the company is reimbursed the difference between the initial advance and the final collected amount. See PurchaseOrderFinancing.com
3. The power of equipment leasing
Leasing equipment allows companies to retain more capital on hand. Instead of rolling the dice with an outright purchase, companies can instead finance their depreciating assets with equipment leasing. However, it's wrong to assume that equipment leasing should only be used on large capital expenditures. Today's leasing options empower small business owners to lease everything from cell phones, computers and laptops, to printers, photocopiers and fax machines. Caution: Know the effective interest rate of your lease. See CrestCapital.com
4. The power of social lending
There are many online social lending options that are available for business owners to pursue. Peer to Peer lending involves person-to-person loans without the intervention of a traditional financial institution. Examples of peer to peer lending websites include LendingClub.com
Granted, business financing will always pose challenges. However, unconventional financing empowers companies to assume a more proactive role in managing their daily finances. Instead of being at the mercy of banks, credit unions, financial markets and slow paying customers, companies can move forward and finance their own operations. Learn about even more creative methods for financing your small business.
Linda Jenkins, June 30 2015
Does your business need money? Whether you need startup capital or working capital, take a few minutes to learn about your options for getting a loan or other type of financing. Doing a bit of research upfront will save you time, stress and preserve your sanity during this often complex process.
Although lenders will scrutinize new small business owners because they lack a financial history, proper preparation and knowing what resources to tap into will greatly improve your chances of getting funded. Startup owners should know first and foremost that approaching a large, nationwide bank is not usually the way to go. Although there are exceptions to this rule, in general, large banking institutions are not in the business of funding small businesses, especially startups. Instead, concentrate your efforts on small community banks, credit unions, reputable online resources, and your own personal network for your small business financing needs.
Loans are not the only way to go. Make sure you are aware of your options. Get our ebook, Creative Financing, to learn more about alternative financing including peer to peer lending, equity crowdfunding and rewards-based crowdfunding.
- Be sure to consult both an Attorney and Certified Public Accountant before signing any financial agreements.
Online Lending Networks
Get a business loan quote online. This can be a fast and hassle-free way to find funding. One of the quickest ways to get working capital is through Kabbage:
Get up to $100K in 7 minutes with Kabbage. Sign up now.
Here are a few other reputable online lending networks you may want to research: LendingClub, OnDeck, DealStruck and LendingTree.
Once you have pursued quotes from online lenders, get prepared to approach offline lenders, assuming you have not already reached your goal. Complete your company's pro forma. Gather the documents you will need to convince lenders that you are a good risk...
Contrary to popular belief, the Small Business Administration does not usually lend directly (except in the case of disaster assistance). Small business owners must first attempt to secure private financing before seeking a SBA-backed loan from a qualified lending institution.
You will need to gather this information to fulfill small business loan requirements for most offline lenders:
A business plan. The business plan is an essential document that gives owners and prospective lenders an understanding of the company's customers, strengths, weaknesses, competition and growth potential. It also highlights your qualifications and expertise as the business owner, and serves as a powerful proposal for financing.
Cash flow projections. Will you be able to repay a loan? Realistic cash flow projections allow the lender to assess business risk. Cash inflows and outflows can be categorized into three main parts:
Operating (sales and business expenditures)
Investing (asset sales and purchases)
Financing (loan payments and proceeds, owner investments & withdrawals)
CAUTION: Lenders will want to see that the majority of your cash inflow comes from operating activities.
A personal financial statement. This is a list of your personal assets and debts. Banks will also typically check the owners' credit report & rating, so be sure to review yours before initiating the business loan process. Another sure way to kill your shot at financing is to have a record of unresolved tax issues. If you are affected by garnishments or liens, be sure to contact a reputable tax attorney prior to approaching any lender.
Business Financial Statements & Tax Returns. In the event that your business has been in operation for more than one year (often a lender requirement), you will need these items to document your financial history.
The use of pro forma spreadsheets can help you organize all of this financial information.
If you intend to present your case directly to a banker or other lender/investor, you need to prepare a convincing small business loan presentation. Start by putting yourself in the lender's shoes. He or She is most interested in the answers to these three questions:
What will you do with the loan?
Are you a risk worth taking?
How committed are you to your own business idea?
Your answer to these three questions will largely determine whether or not you receive funding.
What will you do with the loan? To properly answer this, you will need to be keenly aware of all the details of your specific business plan. You must be able to back up your financial projections with realistic answers. Even if your business is a startup, or you are forging a new industry, you must be able to explain how your research brought you to the conclusions in your business plan, and be ready to explain exactly how the funds you are requesting will be used.
Are you a risk worth taking? The format of your business plan and the results of your credit report may answer this question for you. Your history of taking out and repaying loans (whether business or personal) is crucial here. In any case, you must show some forethought to the level of credit risk you present, and be able to address the lender's concerns. You may find that as long as you have substantial equity in real estate, good cash flow, and a good credit rating, you are a sure bet for bankers. However, if you fall short in any of these areas, you will have to justify the risk. Bankers are also sensitive to the format, flow and content of your business plan, so using reputable business plan software is highly recommended.
How committed are you to your own idea? You must be willing to invest some amount of your own money into the business. This may seem obvious, yet many small business owners expect banks to supply 100% of startup costs. If you intend to invest $0, your loan amount will be $0. You must have some skin in the game to get funding!
For more information on preparing a plan see What to Include in a Business Plan.
If you approach the right lenders, have your documents in order, and are prepared to intelligently address the lender's concerns about loaning you money, you will have a very good chance of getting a small business loan or other financing.
Linda Jenkins, June 22 2015
Are you an entrepreneur on the hunt for capital to grow your enterprise? Or are you contemplating building your own startup company, yet wonder how you'll fund your business once it begins to scale? The best way to end your cash concerns and improve your odds of obtaining operating capital is to build an arsenal of funding-related tools. The following five resources are must-investigate tools for entrepreneurs who plan to accept outside investors into their companies. Whether you're planning on raising seed funding this year or want to know what your options are once your business grows, these resources provide invaluable information your company needs:
Dealroom helps entrepreneurs discover investors appropriate for their company. Find out which investors have previously funded companies in your sector in order to maximize the potential of a successful funding raise. Whether you are looking for an angel investor for your SaaS startup or a venture capitalist to invest in your FinTech company, Dealroom helps you narrow down your options so you can target the appropriate backers.
The Funded is an excellent tool every entrepreneur should have on their resource list. Uncover details on funding options based upon your geographic location, the amount of backing you need, or by the operating competency of potential investors. The Funded is so helpful they even offer a listing of banned investors your company might want to avoid.
Ask the VC
If you are raising capital for your company, it is imperative you understand the documents potential investors will send your way. From deal term sheets to investor rights agreements, you are going to face a steep learning curve to understand everything involved in accepting outside funding for your company. Ask the VC offers a wide range of funding documents you can review including Series A documents, Stock Reverse Triangular Merger forms, and ABA Form of Model Purchase Agreement forms. If you ever plan to accept outside capital for your business, it is essential you understand everything involved in selling equity in your company.
Foundrs provides an equity calculator for multi-party startups. Whether your company consists of just one co-founder or multiple early employees, this handy calculator can help you decide how to distribute equity amongst staff. If you plan to raise angel investor funding or seek a cash infusion from venture capitalists, having a clearly defined equity distribution formula is essential. Investors will want to know what their potential 'up side' is in order to determine whether funding your business makes sense. From who pitches investors to who codes your software, multiple variables impact equity outcomes. Whether you are planning to seek funding or you just want to determine a fair distribution of company equity, this calculator is a must-add item for you entrepreneur's resource list.
Although Sharewave is meant for companies that have already raised funding and have shareholders, they do offer a handy investor relations tool you can use even if you are still bootstrapped. Their helpful messaging interface lets you send official business documents to investors and track all communications with potential backers. Create profiles for investors you hope will back your company and monitor ongoing efforts you hope will entice them to fund your business.
Connecting with appropriate investors instead of chasing wannabe angels who rarely write checks is essential for entrepreneurs who hope to build multi-million dollar startups. Whether you plan to build the next unicorn like Uber or you want to grow a profitable startup that gets acquired by a major player like Google, Apple, or Facebook, you need to educate yourself in every aspect of accepting investor funding. The above-listed tools will help you understand your options so you are able to make informed decisions regarding the future of your firm.
Linda Jenkins, December 26 2014
Need a loan for business?
You're not alone. According to Forbes, the first stop for most small business owners when trying to finance a business is their local bank, but only about 30% actually receive funding this way. Most turn to friends and family for the funding they need. If this is the case, there must be a huge number of business owners out there that are not aware of the new funding opportunities available through these online resources:
Alternative Online Loans
Online lenders are making a big splash and offering better rates and faster and easier application reviews than traditional banks. Although around since 2006, online lenders have really become a force in small business lending over the last two years. For example, if you run an online store on Amazon, eBay, Etsy, Shopify or Yahoo, then get a quote from a source that understands your unique needs. Read about how qualifying with this online lender can help you grow on your terms.
Peer to Peer Lending
Peer-to-peer lending, sometimes abbreviated as P2PL, allows business owners to get loans from unrelated individuals, or "peers", without going through traditional financial intermediaries such as banks. Peer to peer lending has flourished in the United States since 2006. Prosper.com is the longest-running example of this method of financing. Essentially, business owners post online loan listings and individual lenders review them. Loan requests are generally ranked by risk which often correlates with the owner's repayment history on other loans. Once this process is complete, borrowers make fixed monthly payments and lenders receive a portion of those payments directly into their account.
Peer to peer lending often results in a higher percentage of business owners receiving capital at a lower fixed rate. This industry also fills a gap in the lending community as most banks cannot make financial sense out of lending smaller amounts (ie., $10,000 or less). Business owners, especially those that are in business for the first time, really need to take advantage of this win-win situation. P2PL definitely provides a strong alternative source of capital for your business. Get the money you need while also shielding family members from risk and avoiding unproductive applications at the bank.
For business owners willing to give up a percentage of ownership in their company, equity-based crowdfunding is a great opportunity. Business owners create online listings seeking investors and exchange a percentage of ownership in their business for the capital they need. Investors on these sites generally seek-out highly innovative companies, similar to what a venture capital firm would look for in an investment. Crowdfunder.com is an excellent source of this type of funding.
If you are unwilling to give up any ownership, try rewards-based crowdfunding. This amounts to online fundraising for businesses where large numbers of people contribute to your capital request and only expect you to make good on the reward you established in your profile. For example, you might offer free samples of your product or a deep discount on your service to individuals that successfully fund your request. Visit Fundable.com for a great resource that offers both rewards-based and equity-based crowdfunding campaigns for seed stage businesses in the US.
Read more about creative financing solutions.
Linda Jenkins, April 30 2014
Most successful businesses, from Microsoft to the corner bakery, began as a business owner in need of financing. Many institutions exist for the sole purpose of helping you and other budding entrepreneurs find the financing needed to realize your dreams. Here is an overview of some options for funding your business:
Read on to discover other ways to get enough capital to start or grow your company.
Social Lending and Crowdfunding
There's no need to confine yourself to funding from traditional sources like banks. Innovative social lending websites, like Prosper.com in the United States and Zopa.com in the United Kingdom, provide entrepreneurs with a unique and important source of potential funding. GoFundMe.com and Crowdfunder.com also offer "crowdfunding", allowing individuals to receive funds from people around the world who believe in their entrepreneurial vision. Further details on sources like these and others are available in the ebook "Creative Financing". This ebook explains why you cannot afford to overlook social lending networks, and prepares you to submit a better request for funding whether you decide to pursue debt financing, equity financing, or a combination of the two.
Many online lending networks, such as Kabbage, make the process of getting loans much easier. Applications can often be completed in minutes and successful requests are usually filled at rates much lower than through traditional banks. Learn more about loans and online lending networks.
Friends and Family
Even with today's modern financing methods, many cutting-edge entrepreneurs still turn to friends and family for financing. For example, Isaac Raichyk, the founder of the wildly popular website Keek, received an initial injection of cash from friends and family. Many people prefer to borrow money from people they know rather than a bank. After all, the bank doesn't know you personally, so it can't adequately weigh intangibles such as your personal character, your skills, or your large network of potential customers. However, your friends and your family are able to weigh these factors and may prove willing to provide financing even when other lenders will not.
Of course, you will want to exercise caution when soliciting loans from friends and family. An unpaid loan can strain personal relationships. You will want to ensure that nobody loans money they cannot afford to lose, and you will probably want to formalize the terms of the loan using an attorney. If the cost of an attorney is too steep, you will want to purchase personal loan documents at an office supply store, download a free loan agreement template online, or use ZimpleMoney to simplify the process of borrowing from family. This ensures that everybody understands exactly the amount to be loaned, the amount to be repaid, and the timing of payments.
You might be surprised to learn that many entrepreneurs fund their business simply by reinvesting their own business profits, thereby avoiding external funding. Many successful businesses are funded in this manner, in part because the process allows a business to expand product and/or service offerings quickly, fine-tune its offerings over time and avoid debt.
Banks have provided small businesses with capital for generations and are perhaps the most traditional means of obtaining outside financing. Many banks focus heavily on serving small businesses and almost all have a department dedicated exclusively to business customers.
Banks offer a variety of specific loans tailored to the needs of small businesses. Many such loans are "secured loans", meaning that the amount owed is personally guaranteed by the signatories to the loan. Often a bank requires that 80 percent of the ownership of a business secure a loan with their personal assets. In other words, if there were five partners, and each owned an equal 20 percent share, the bank would require four of the five to personally guarantee the loan before releasing funds. This requirement, though seemingly burdensome, ensures favorable rates and ongoing access to funds.
Some loans are secured directly by the assets that are the subject of the loan. For example, a car may serve as security for an automobile loan. If the borrowers fail to pay off the loan, the bank can repossess the property. This provides security for the bank, allowing it to loan money with confidence at reasonable rates.
Banks also provide small businesses with real estate loans, cash-secured loans, and even loans earmarked for agricultural purposes. Many banks are willing to customize loans for small business owners that its records indicate have a track record of meeting their obligations; however, applicants with previous credit issues, or first-time business owners may have more difficulty getting a loan from a bank.
Credit unions offer the same essential services as a bank, but unlike banks, they do not exist to profit from their members. Instead, credit unions are run for the benefit of their members and are legally characterized as not-for-profit institutions. They offer more favorable terms than a bank, and their terms are often more straightforward and contain fewer hidden fees.
You will need some sort of affiliation with the union's existing membership in order to join. Some credit unions exist to serve people who work for a particular employer, while others serve those who live in a particular area. Your university, church, or labor union may also have given rise to an affiliated credit union. Most people are able to find a credit union to join with a little effort.
Once you join, you can request a loan from the union's Board of Directors, who are elected by the union's membership. The Board is often sympathetic to individuals' personal circumstances and will take the time to get to know you personally as it considers extending credit.
Venture Capitalists & Angel Investors
Venture capital firms provide money to companies in innovative industries such as information technology and biotechnology. Typically, venture capitalists are highly sophisticated investors with a deep understanding of their target industry. Their deep grasp of the marketplace allows them to identify wise investments that others might overlook. Venture capitalists are known for their willingness to take risks on companies that are speculative in nature.
If you have a small scale startup, it is more likely that you would seek funding from an Angel Investor. In reality, this could be any wealthy individual that is willing to exchange his or her funds for equity in your business. A great place to start your search for an angel investor is through professionals you already know, such as your local Certified Public Accountant or Business Attorney. Generally speaking, these individuals are well-connected to the community and can introduce you to individuals that may want to invest in your startup. You can also research accredited Angel Groups through the Angel Capital Association.
The Small Business Administration
The Small Business Administration (SBA.gov) provides billions of dollars in funding for Americans who want to start a business. Interestingly, the SBA doesn't usually provide direct funding for small businesses. Instead, it guarantees loans made by traditional small business lenders such as banks, which allows these lenders to offer loans at a much lower rate than would otherwise be possible. Loans obtained through the SBA are usually offered at unusually low rates and allow for repayment terms of up to 25 years.
SBA loans come in several different flavors. SBA Express Loans are widely available and will often work for those seeking loans of up to $500,000. SBA7(a) loans and 504 loans are used for loans of between $250,000 and $5 million, though more money is available for those seeking to purchase real estate.
Veterans and their relatives will find the SBA particularly eager to lend. Loans can be used to purchase equipment, real estate, or even for debt refinancing. In keeping with its model of offering financing through private banks, hopeful business owners usually apply for a SBA loan at a private bank, rather than at the SBA's offices.
A microlender is a fund that offers very small loans to individuals to help them start small businesses. Microlenders extend loans of only a few thousand dollars. Originating in the third world as a way to lift the desperately poor from poverty, they have since spread to the United States and other industrialized nations. Many focus on offering loans in underserved communities. Microlenders extend loans to small restaurants, food trucks, landscaping businesses, small retailers, and the like. Most are not-for-profit institutions. Examples include California's "Opportunity Fund", a microlender that offers loans as low as $2,500 to hopeful California entrepreneurs. Learn more about microlenders.
Other Government Entities
The Small Business Administration isn't the only governmental body that offers loans to aspiring small business owners. In fact, many organizations, at the federal, state, and local level, offer funding for small businesses. One example is the "Mom and Pop Small Business Grant Program" offered by Miami-Dade County, in Florida. This program offers funding and technical help to small businesses, and also helps to create valuable ties with local officials. Many other government entities offer similar programs. A great place to start researching is through your State's official government website (ie., Michigan.gov).