When I talk to small business owners, they’ve usually heard of a few ways to apply for small business financing. Occasionally, an article will come out that lists 5 (or sometimes 10) ways to get a small business loans.
The truth is that there are dozens of ways to finance a small business.
There are some pretty good ways to finance your business…
… other ways to finance your business aren’t so smart.
Depending on your situation, however, there are probably some good ways for you to finance your businessthat perhaps you haven’t heard of.
For that reason, we’ve attempted to assemble the most complete list on the internet of different ways to acquire small business loans.
Traditional Lending for Small Business
Traditional sources of business lending are usually the cheapest options, with annual interest rates usually 10% or below.
The only problems with most traditional lenders:
- It takes an outrageous amount of time to apply for their loan products (25+ hours for many bank loans)
- Very, very few small businesses ever get approved (often less than 15%)
However, many of these loans can be the best products for your business, particularly if you’ve been in business for a long time, have great credit, a lot of collateral, and do over $1 million in annual sales.
1. Big Bank Financing: One of the toughest loans for a small business to get is financing from one of the larger banks. “Big banks” are defined as institutions with $10 billion or more in assets.
2. Small Bank Financing: While still requiring good credit, assets, and time in business, it is considerably easier to find financing at smaller (under $10 billion in assets) banks
with 2014 approval rates of around 50%. Like at the big banks, rates should usually be under 10 percent with a smaller bank.
3. Credit Unions: Credit unions have been reported to approve about 40% of small business loan requests recently, although reported numbers have been disputed.
4. SBA 7(a) Loans: One of the only
traditional lending mechanisms available to startups, SBA 7(a) loans are available for real estate, equipment, or working capital. Like most traditional lending, the SBA 7(a) pretty hard to come by, and requires collateral, typically your personal residence.
If you manage to get an SBA 7(a), it will require a blanket lien on all of your assets, both business and personal.
Rates are pretty low, from 6.25 to 7% as of October 2014. You can apply for the 7(a) at most banks and credit unions, or from other SBA lenders.
The SBA maintains a
list of providers with important data such as how many loans that have been done and the sizes, along with “lender relations specialists” for you to contact in each area.
5. SBA 504 Loans: SBA’s 504 loan can only be used for land, buildings, equipment, or “modernization” of your current location. Like the 7A, it can be very difficult and time-consuming to qualify for, but if you’re approved you’ll enjoy low interest rates of around 5%.
You can apply for a 504 loan through banks and credit unions, but Certified Development Centers exist nationwide that specialize in 504 loans as well.
Per the SBA, CDC’s are nonprofit corporations certified and regulated by the SBA, that work with participating lenders to provide financing to small businesses. There are 270 CDCs nationwide, each covering a specific geographic area.
6. SBA Microloans: SBA Microloans are loans up to $50k (average of $13k) available from intermediaries throughout the US. The SBA only guarantees up to 50% of the microloan, so terms and rates vary by lender.
Like all SBA programs, the government has found a way to make things painful, and makes you take classes first and also prove you were unable to get loans from private sources.
7. Disaster Loans: If your business is located within a declared disaster area, you may be eligible for an SBA backed disaster loan. Rates on disaster loans for business run from 4-6%.
8. Credit Cards: No list of ways to finance your business would be complete without good old credit cards.
Rates generally range from 10-30 percent, but a recent comeback has been credit card companies mailing out 0% teaser rates (keep in mind there’s usually a 4% fee) – making credit cards to a certain extent worth considering for at least a portion of your business credit needs.
Alternative Small Business Financing
Alternative (private) Financing exists for businesses that cannot get financing from traditional sources.
Some types of alternative financing are reasonable, while some are hideously expensive.
The expensive options aren’t always bad, as in some cases they may be your only options, but the way they are marketed and sold often leaves something to be desired.
9. Working Capital Loans: Working capital loans from private sources are typically marketed on a “daily payment” model meaning money is debited from your checking account from Monday through Friday, excluding holidays.
Daily payments are used to demonstrate how easy the loans are to pay back, since the payments look small, but the real purpose is to obscure the fact that you will be paying interest rates from 50% to 150%.
10. Merchant Cash Advances: Similar to working capital loans, but merchant cash advances draw a fixed percentage of your daily credit card sales, typically 10-15%.
With interest rates usually starting at 80% and up, while merchant cash advances are (very) occasionally an ok solution, the way these product are marketed and sold is often anything but transparent. Usually, you can find better loan options if you know where to look.
11. Business Cash Advances: Business cash advances are pretty much the same thing as private working capital loans, just marketed under a different name.
The same caveats apply: be very careful when looking for a business cash advance as most companies marketing these products will do everything they can to hide the rates from you.
12. Term Loans: In the alternative financing world, “term loans” are used to describe business loans with lengths from 1 to 5 years.
Not many alternative lenders offer these loans, as you can make more money offering short-term loans at 100% and hoping the loan gets continually renewed. For your best bets on term loans, skip ahead to our section on crowd-based (P2P) solutions.
13. Invoice Factoring: If you’ve got outstanding receivables, you can get paid a portion of those outstanding bills today using the receivables as collateral.
Rates range from 2% to 10% monthly, depending on the riskiness of the outstanding bills being paid and whether you or the factoring company is responsible in case one of your customers decides not to pay.
As an example, an advance against a $10,000 invoice paid back over 12 weeks would result in total charges between $482 and $682 – or about 5.5% of total revenues – about half of what the same transaction would cost with a factoring company.
“Fundbox improves the cash flow process for small businesses by bridging the gap between accounts receivable and accounts payable.
We started the company to help healthy small businesses who are having cash flow gaps due to the influx of invoices being issued and invoices being paid.
Fundbox provides a tool to deploy working capital to a business without disrupting a company’s workflow.”
– Fundbox CEO Ayal Shinar
15. Purchase Order Financing: Very similar to factoring, but P.O. financing relies on outstanding orders as opposed to receivables.
Rates can be similar to factoring, 2-10% per month depending on risk level.
16. Revenue Loans: A relatively new product, mostly for tech and software companies, revenue loans offer businesses loans from $50,000 to $1,000,000 to be paid back as a percentage of revenue.
Like most alternative financing, revenue loans aren’t “low interest rate” products – interest rates range from 15-30%, but as they are available to early stage companies (and don’t require you to be profitable) revenue loans can be an excellent alternative to venture capital.
17. Royalty Financing: Similar to revenue loans, royalty financing is an option where you can sell the future royalties generated by some asset. Royalty financing is can be structured as debt, paid back over time based on a percentage of revenue, generally 2 to 6 percent.
Royalty financing will sometimes be structured with an “equity kicker” – an option to convert some of the debt into “shares.” While most people think of music or television assets when the term “royalty” is mentioned, any asset that generates cash flows can be leveraged.
18. Non-SBA Microloans: While microloans in the US are primarily backed by the SBA, there are also many non-profits that offer microloans without the SBA’s backing (and requirements).
Asset Based Lending
Loans for or against some sort of asset are generally easier to obtain than any other type of loan, as there’s something for a lender to repossess if payments aren’t made.
19. Equipment Leasing: One of the easiest types of business financing to obtain is an equipment lease. For
hard assets such as dump trucks, even a startup business with reasonable credit could very well qualify for leasing.
Equipment leasing rates are reasonable with good credit, and can be high with bad credit, but tax advantages can often negate a considerable portion of the finance charges.
20. Sale-Leaseback of Equipment: Technically an equipment lease, you can
borrow money against the equity you have in your equipment. With assets such as trucks, machinery, or other heavy equipment, you can borrow money (typically up to 40% of your equity) against the assets and pay the “lease” back over 1 to 5 years.
Any credit rating will qualify for a sale-leaseback, and the transaction can be structured so that tax benefits greatly reduce (and sometimes completely negate) any finance charges.
22. Hard Money Loans: Another method to extract money from the value of real estate is hard money lending. Regardless of your credit or anything else, if you have a lot of equity in real estate, you can borrow against it.
Hard money loans are usually shorter term (up to 3 years).
Brandon Turner, BiggerPockets’ VP of Growth and Communications, adds:
“Hard money can be great, just be sure to understand the risks. The short term nature of the loan can cause some headaches if you aren’t quick, and the high rates can add significantly to your holding costs each month.”
23. Inventory Loans: If you have a large amount of inventory, you can potentially take out a loan against that inventory for up to 50% of the value. The terms and qualification depend on the quality of your inventory, your credit and financial health, and how fast you are actually turning the inventory.
24. Asset-Based Lines of Credit: For companies of decent size needing larger amounts of funding (typically $250,000+) you can often establish a line of credit against a percentage of the value in your assets such as your business equipment or machinery.
Asset-based lenders can be found in the same link above to the Commercial Finance Association.
25. Securities-Backed Financing: An often overlooked avenue is margin-loans against securities that you own. You can borrow against stocks, bonds, or mutual funds that you own as long as they aren’t held in a “qualified account” such as an IRA or 401k. Margin loan rates are currently around 8%.
This can be pretty risky – if your stocks decline in value you could receive a “margin call” and the loan will become due immediately – so use this resource sparingly, but borrowing against a small portion of your securities can be an effective use of capital.
Crowdlending (a.k.a. Crowdfunding Loans) for Small Businesses
A relatively new way of financing your business, crowdlending is a small but rapidly growing part of the business financing arena. Crowdlending allows individuals or smaller institutions to invest in companies, often based on online “auction” systems.
In many cases, crowdlending provides coverage of the “gap” that often exists between low priced traditional lending and some of the higher priced alternative solutions out there.
26. Auctioning of Receivables: Companies with outstanding receivables that need to be monetized have traditionally looked to individual factoring companies to provide financing, which can be time consuming. Another problem in the traditional factoring world is segmentation: factoring companies may work with only trucking companies, or only medical companies, or some other industry but refuse to work with others, etc.
A new development is crowd-based marketplaces that allow a business owner to go through due diligence only once, saving time, and get multiple offers for their receivables financing.
27. Crowdlending Term Loans: An alternative to the sky-high interest rates offered by business cash advance lenders, term loans are now being offered on a crowdfunded basis that have higher rates than bank lending, but finance charges of less than half of what is charged by alternative lenders.
Loans of $50,000 to $500,000 can be taken out over 1 to 5 years with rates ranging from 10 to 35%.
28. P2P Working Capital: For shorter-term (up to a year) and smaller ($5,000 to $100,000) loans, an option has emerged in recent years to provide loans at a lower cost than most alternative lenders around.
You could borrow $10,000 for 6 months and pay back about $11,500 via daily payments. This is a high interest rate loan, but has lower finance charges than most other short term options available to small businesses. This is
another option we can help you look at.
29. Crowdlending Lines of Credit: For advances against assets such as your receivables, crowdlending has an option for that too. Like most things crowdlending, this product fills the gap between unobtainable “traditional financing” and nosebleed rates with alternative lenders.
30. Crowdbased Revenue Sharing: For small businesses with some track record that are trying to grow into much larger businesses, revenue sharing sites may sometimes be a good answer.
“Bolstr is a marketplace for emerging businesses to raise funding for expansion from real investors. We work with successful businesses looking to access funding in order to grow to the next level, without giving up equity ownership.
Our unique revenue share investment structure provides businesses with pay back flexibility, because monthly repayment is proportional to the amount of revenue generated each month.”
-Bolstr Co-Founder Larry Baker
Industry Specific Loans
Many industries have government-backed, supplier-backed, or other loans special to that industry that can sometimes have very favorable terms as compared to other marketplace options. There are hundreds of these loans hidden in little “niches” of the marketplace, but here is a good sampling of what is available:
31. Loans for Farmers: There are several loans available specifically to farmers, many sponsored by the Federal Government or by your state.
32. Loans for Childcare Providers: Most states sponsor loan programs specifically for childcare providers, simply type [childcare provider loans] + [your state] into Google and several resources should pop right up.
33. Healthcare Practice Financing: There are companies that specialize in lending only to medical practitioners (doctors, dentists, optometrists, etc.) that provide low rate loans (comparable to bank lending) to practitioners with good credit histories and collateral.
34. Tourism Loans: If you operate a business in the tourism industry, your state may very well have a special loan program for you. For example, Arkansas has
a tourism development loan program by which the state will match loans 50/50 with local lenders, making financing easier to get.
To see if your state has a similar program, simply type into Google “State” +”tourism loans”
Small Business Loans for Women
35. Key Bank’s Key4Women: Keybank has
a special program called Key4Women, which includes access to financing along with a searchable list of “resource centers” that include advice and publications about business financing and growth.
37. Women’s Venture Fund: Another great resource for women entrepreneurs, the
Women’s Venture Fundhas helped more than 17,000 women entrepreneurs in New York fund their businesses.
40. Woman Owned Small Business Federal Contract Program: This one is hard to puzzle out, as like most things written by the government, the explanation on the SBA’s website is so poor it might as well be written in Chinese Algebra.
Small Business Loans for Minorities
There are a number of programs that have been developed for minority business owners:
The National Minority Business Council Offers loans to members ranging from $1,500 to $25,000
Loans can range up to $500,000.
Qualifying businesses should be under $15 million in revenue and have been in business for at least 2 years, with total borrowing needs of less than $2.5 million.
Just look up “your state” + “loans for minorities” on Google.
47. National Minority Supplier Development Council: The
NMSDC has centers nationwideto connect minority small business owners to other, larger corporations, including lenders.
Small Business Funding for Veterans
49. Service Disabled Veteran Small Business Loans: The SBA also runs a second program, for veterans who were disabled while serving our country.
Details are here.
50. Veterans Business Fund: The
Veterans Business Fund is a nonprofit organization that exists to help provide veterans with loans start businesses. Per the website, the fund:
Was established in response to the high unemployment rate among veterans, many of whom are well qualified through their military experience to become successful small business owners but lack sufficient equity capital to qualify for a small business loan.
52.
New York’s Veteran Loan Program: For New York State residents, per
NYBDC.com:
Our Veteran’s Loan Program provides term loans from $50,000 to $150,000 at fixed below market interest rates for current or former members of the United States’ armed forces.
Special Note: Most states and many counties have special programs for veterans. just Google “your state” + “loans for veterans”
Miscellanous Funding Sources for Small Business
There are a number of ways to fund your business that aren’t as easily categorized – here are a number of methods that can only be categorized as “other” –
54. Seller Financing: If you’re buying a business, you can often get the seller to finance at least part of the transaction via earn out.
According to
Bizfilings.com, seller financing is involved in up to 50% of business sales.
55.
Product Presales: Some businesses with new products coming out have successfully financed the entire process through product presales.
Kickstarter and
Indiegogo are two sites that have facilitated a great number of presales.
56.
Trade Credit: We talked earlier about financing your receivables through factoring. If you have receivables, essentially your customers are borrowing from you.
Many times, you can finagle what amounts to a “loan” by negotiating longer terms with your suppliers.
57.
Hedge Fund Loans: Hedge funds are quirky investment vehicles that specialize in taking calculated risks in order to achieve high returns.
Lately, some hedge funds have increasingly been involved in high interest business funding. These are, however, under the radar and require some digging to find.
58.
Customer Loans: In some cases, you may be able to get loans from your customers.
Per
Investopedia, Borrowing from business customers started in the early 2000s with community supported agricultural loans (CSAs). In CSAs, farmers’ customers loaned money prior to the planting season and took payment in harvested product at discounted prices.
59. Online Pawn Shops: A little bit off the beaten path, but if you have assets, such as electronics, jewelry, or firearms, a few online pawnshops have popped up that will lend against those assets at fairly reasonable rates.
