The 8 best options for small business funding

For many small businesses, access to funding can be a matter of life and death. 

The stakes are especially high given that 18.4% of U.S. businesses fail within the first year, 49.7% after five years and 65.5% after 10 years, according to a LendingTree analysis of data from the U.S. Bureau of Labor Statistics. One of the top reasons businesses go under is lack of funding, so it’s especially important to know where to turn if you need a lifeline. 

While the options can depend on factors such as size, industry, amount needed, time frame and purpose, here are eight possibilities to consider:

1. Family and friends

This can be a great place to turn because it doesn’t generally come with a lot of financial background requirements or other pre-requisites. “Uncle Charlie is going to be more willing to believe in you without requiring extensive financial documentation,” said Joshua Oberndorf, a manager in the private business services group at EisnerAmper.

Pros: Easier access to needed funds without high interest rates.

Cons: Failure to pay back the funds in a timely manner, or reneging completely, could sour family relationships. Money is as much accounting as it is psychological,” Oberndorf said.

What else to know: According to the IRS, family members are supposed to charge a minimum interest rate to avoid adverse gift tax consequences. The IRS publishes these Applicable Federal Rates (AFRs) on a monthly basis.

2. Banks

Pros: Trusted and well-established source of funding. May be lower cost than other options and offers the ability to grow the lending and banking relationship over time.

Cons: Banks can have rigid lending requirements, including a good personal credit score and ample cash flow and income, that may be out-of-reach for some credit borrowers, and the process can be slow, sometimes several weeks to secure a loan.

What else to know: Rates can range from around 3% to about 7%, according to LendingTree. Consider a smaller bank, which may be more willing to grant credit and walk you through some of your options, said Matt Barbieri, a certified public accountant with Wiss & Co., who provides business advisory services.

3. Online lenders or funders

Pros: Offers quick access to capital, generally through a simple, online process.

Cons: It can be hard to discern actual cost of capital, especially with a merchant cash advance, which is an upfront sum that a business is on the hook to repay using a percentage of debit and credit card sales, plus a fee. Some online lenders and funders may not have long-standing track records, and the option may be more expensive than others. An online loan, for instance, has an APR of between 7% and 99%, whereas the approximate APR of a merchant cash advance runs between 40% and 350%, according to NerdWallet.

What else to know: Do your due diligence on any online lender or funder you plan to use, said Craig Palubiak, president of Optim Consulting Group. Make sure the company has a good reputation and multiple good reviews, and be sure to compare multiple options. It’s also important to drill down to the total cost of capital, taking into account the interest rate, if applicable, fees, and early payment penalties, if any.

For help understanding the true cost of a merchant cash advance, use an online calculator.  

4. SBA loans

Pros: Federal-backing provides access to low-rate bank financing for small and large loans. There are different types of loans and lenders and programs have unique eligibility requirements. Resource centers are available to help business owners, including those in underserved communities.

Cons: The approval process can be slow. The timeline depends on the loan, but generally it can take a few months. A down payment or collateral may be required. Low-credit applicants may not be approved.

What else to know: There are different types of SBA loans, and maximums vary. The most common SBA loan type is called 7(a), and you might expect to pay somewhere in the range of 7% to 9.5%. ”Be prepared to work on a refinance as soon as the agreement allows,” Barbieri said. This will allow you to remove personal guarantees and restrictive covenants that can stifle growth, he said. An SBA loan may offer a longer repayment term — under the 7(a) program, up to 10 years for equipment and working capital; 25 years for real estate — and may offer competitive interest rates compared with conventional bank loans.

5. Credit cards

Pros: Quick access to capital with the possibility of rewards. It could be a good option for short-term funding needs, if you are certain you can pay off the debt before interest starts to accrue. Business cards tend to carry higher credit limits than personal cards.

Cons: Interest rates can be high. Cards that are well-ranked by Creditcards.com offer APRs in the range of close to 10% to nearly 35%, and some cards charge an annual fee. Generally not a good option for large funding needs.

What else to know: “Don’t rely on this as a sole source for funding growth; if you are too high risk for the other categories, seriously consider that before taking on consumer credit as a business,” Barbieri said.

6. Investor equity

Private grants, private equity and individuals with money to invest can serve as sources of funding. 

Pros: Positive cash flow, as well as expertise to help propel the business forward. 

Cons: Dilution of capital, difficult to find the right match. 

What else to know: Palubiak recommends owners tap their network and affiliate with start-up communities and local organizations to make investor connections.

“Spend as long as you can dating before picking your mate,” Barbieri said. “Make sure their goals are aligned with your goals or it will end badly.”

7. Federal, state and economic development grants

Pros: Typically non-dilutive, can be small or large.

Cons: There can be administrative hassles and restrictive eligibility requirements. 

What else to know: This could be a good option if you are a company that can be deemed “important” to the infrastructure of your region, Barbieri said. Start your research by researching resources on the website of the U.S. Economic Development Administration to find EDA regional office contacts, state government contacts and other information. 

8. Crowdfunding

Pros: Allows you access to capital without piling on debt, and the ability to raise money and increase awareness of your brand among potential investors and customers while test-marketing an idea.

Cons: May have a low success rate. Could be fees associated with certain platforms. Also, launching a successful campaign takes marketing resources and time.

What else to know: There are a growing number of available equity crowdfunding websites. Before choosing a provider, make sure you understand how the platform works, the fees, who can invest and how it could accomplish your specific funding needs.

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.