Linda's Small Business Corner: Deciding on Financing
As a small businesses owner, raising capital is one of the biggest challenges you will face. You have bills to pay, revenue ramping up slowly, and no business credit to get financing. So our first piece of advice is DON'T open a business until you have a good business plan in place and your finances in order; the worst thing that can happen is for you to spend a bunch of money only to end up closing soon after. Ask any small business owner that has failed as to why, and 90% will tell you its because they simply ran out of money.
If for some reason you are already open or realize in advance you need money to get starting, there are many alternatives for you, including SBA Loans. We will attempt to educate you on the various options you have as a small business owner.
The 7(a) Loan Program is SBA’s primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business purposes. SBA does not make loans itself, but rather guarantees loans made by participating lending institutions. In this way, taxpayer funds are only used in the event of borrower default. This reduces the risk to the lender but not to the borrower, who remains obligated for the full debt, even in the event of default. Click her for Lender Documentation Resources and Tools.
While the vast majority of businesses are eligible for financial assistance from the SBA, some are not.
Applicant businesses must:
Operate for profit;
Be engaged in, or propose to do business in, the United States or its possessions;
Have reasonable owner equity to invest;
Use alternative financial resources, including personal assets, before seeking financial assistance.
There are other alternatives before you apply for an SBA Loan, they Include:
Friends and Family: If you have a relative or friend who may have spare cash, you might want to think about asking them to lend you some money to help start your business.
This is an attractive alternative to traditional lending as you may work out low or no interest repayment. Just be sure you can pay it back to avoid damaging your relationship.
Personal Financing: Using your savings to start your business shows future investors that you are willing to “put your money where your mouth is.” and that you have true skin in the game. Our advice, always have at least 4 times your expenses saved up before you start dipping into your personal funds.
Micro-loans: In 1992, the United States Small Business Administration (SBA) introduced a program to help Small business secure the financing they couldn't get from traditional lenders like banks. Non-profit companies act as intermediaries and receive money from the SBA to lend to small businesses at relatively low interest rates.
Peer-to-Peer lending: This option uses the internet to find individuals interested in funding your business. A popular site is Prosper, where interested lenders bid on your loan. You choose the lender whose terms you find most agreeable.
Another social lending site is LendingClub, which uses a system based on credit ratings.
Crowdfunding: Crowdfunding is similar to peer-to-peer lending but instead of paying interest on the loan, you typically send investors a gift, such as the product they helped launch, or you give them equity share in the business.
Online Lenders: Online lending services such as Ondeck and Kabbage are a popular alternative to traditional bank lending since they offer speed and ease.The application takes less than an hour to complete and a decision is forthcoming in only a few short days after which funds are dispersed.
Home Equity Loans: If you own your own home and have equity, a home equity loan can be a great way to finance your new venture.Because the loan is secured, they generally have low and flexible interest rates, especially when compared with traditional commercial loans.
Credit Cards: Business credit cards are easy to apply for and receive, and offer a quick way to get your business up and running. You can pay only the minimum amount due until your cash flow gets moving.
Factoring: Invoice financing companies such as Fundbox will advance you the money to pay your bills, and you pay them back once your customers pay you. In essence, you are selling your accounts receivable to a third party, which allows you to bridge the gap between work billed to customers and payments to suppliers.
PeoplesFund.org: People's Fund is a non-profit organization that pulls potential investors and vets small businesses that need assistance. Similar to SBA Loans, they are an alternative to financing when you have exhausted other means. The good news about People's Fund is that they do take a personal interest in your business so you are dealing with people who care and truly want to help you succeed.
If in doubt, go to an SBDC Center. They have great counselors there that can help you or at a minimum put you in contact with someone who can.
You can find SBDC Centers in many Community Colleges across the country. There are 900 total and quite a few in the DFW area. To find the one nearest you, click here.
Best of luck and keep on with your entrepreneurial dreams!