Politicians and financial experts agree that small businesses are vital to the overall health of our economy. However, securing business financing has become an increasingly challenging task. Banks that once eagerly lent to small businesses have significantly reduced the number of loans being issued and decreased the dollar amount of these loans.
The good news is that there are now more options than ever to secure business financing. However, it pays to understand your options for small business financing before you choose any one option.
This guide provides a brief overview of your choices for getting the working capital you need to grow your business. The more you understand about small business financing, the more likely you’ll choose the option right for you.
Securing Business Financing through a Bank
Every business needs a bank for checking, savings, and maybe a credit card. However, it’s smart to consider its ability to offer you a loan if you need money to grow.
Some banks have more straightforward lending policies than others. For example, relationship managers at community-based banks may have more discretion to approve a loan than one at a bigger, national institution. However, larger banks may have more favorable rates. And, not all banks are agreeable to working with the U.S. Small Business Administration loan system.
Yes, determining what bank to work with can be a challenge. However, if you have patience, good credit, and a bank you feel comfortable working with, a bank loan may be an option for securing business financing.
Borrowing from Family and Friends
Institutional lenders might not see the value in your business quite the same way as Mom or Dad. Thus, many business owners turn to their parents, or other family members or friends, to get funds to grow.
The benefits of borrowing from loved ones are substantial. They are often more willing to lend money without you having an established track record. The interest rate is often better, too. Yet, there are often strings attached that can last long after you pay back the loan.
If you do choose to secure business financing through family or friends, it’s vitally important to clearly structure the deal with your lender. Putting into writing whether funds are a loan, a gift, or an investment is a good idea. The terms of the agreement should be spelled out, too. These can be solidified by using an online service such as Prosper Inc or Virgin Money that structure payments between borrowers and individual lenders.
Using Credit Cards to Fund Your Business
The use of credit cards to fund businesses has increased significantly over the last several years. This is due to a number of factors. First, it’s often much more convenient for new businesses to open a credit card account than to obtain a bank loan. A credit card is also a way to establish credit in a business’s name. And, there are often valuable rewards programs that can be especially beneficial, particularly for those that have employees traveling.
Choosing a credit card to secure business financing does require you to take a close look at several aspects of you business. You should begin by evaluating your spending habits and ability to pay back what you owe. Some cards offer better annual percentage rates or those that carry a balance and have good credit. Others offer attractive fixed rates. You should also compare reward programs, annual fees, and grace periods to determine the best card for your specific needs. Online credit card comparison sites such as Bankrate.com can help.
Finding Angel Investors
Many small business owners begin looking for angel investors after tapping family and friends. “Angels” can be a good source for financing, but they are usually more selective in who they invest with and may want to have a thorough understanding of your business plan.
If you are interested in finding an angel investor for securing business financing, it’s a good idea to first check with industry associations, local trade groups, or business incubator centers to find angels that have an interest in your industry. These lenders also often invest through groups or networks.
While angel investors can help propel a business to success, it’s important to remember that they look at any loan they provide as an investment, and they rarely dole out funds quickly. Getting funding for your business this way is rarely easy, but if it’s done with the right approach, it can be lucrative for both you and the angel investor.
Tapping into Retirement Savings
IRAs and 401Ks can finance businesses in some cases. This requires rolling over the money into a corporate retirement account that allows you to invest in the business. To do this, it’s smart to work with a qualified third-party retirement plan administrator or financial planner. Keep in mind that if this process isn’t managed correctly, you may be forced to pay taxes on the money you use and an early withdrawal penalty. Of course, because many small businesses fail, it’s also not wise to use your entire retirement nest egg on funding your business.
With the continued growth of online businesses, non-traditional lenders, such as Kabbage, have begun offering flexible funding. By helping business owners to secure business financing quickly (often in less than 10 minutes), Kabbage is becoming a popular option for those that want to access funds quickly to take advantage of an amazing deal on inventory, hire help, or purchase equipment.
As your business grows, securing business financing will continue to be a need to consider. Whether you choose to borrow from a bank, non-traditional lender like Kabbage, or mom and dad, it pays to take a close look at the pros and cons of the finance terms.