This blog was last updated on February 15, 2021.
Business funding is essential for most business owners at some point in their growth. But finding the right lender and loan package for your specific situation isn’t always easy.
How important is it to have a lending source that you can trust and count on to be there when you need them? Cash flow challenges are common in the business world and are one of the top reasons small businesses fail.
You may know that 82 percent of small businesses that fail have experienced cash flow issues. That’s an alarming statistic for any business owner to digest.
The good news is that there are numerous financing options for your business. The key is finding a lending source you can count on to be there when you need them with a loan program that’s flexible enough to meet your needs.
This guide covers multiple business funding options available to business owners. It covers sources such as banks, friends and family, investors, and alternative lenders that specialize in business loans. Also, how to select the source that best meets your specific business needs.
Most business owners start out looking to large, traditional lenders such as banks for financing. However, according to 2020 statistics, banks only approve 28 percent of loans.
Even if you’re one of the lucky few that gets approved, the loan process can be lengthy (it can take weeks or months) and often requires a large amount of financial data, supporting paperwork, and collateral to qualify. By the time funding is received, you may have missed an opportunity to profit, or your business may have suffered due to the delay.
Small Business Administration (SBA) Loan
Small Business Administration (SBA) loans are long-term financing. The maturity of an SBA loan depends on your repayment schedule, what the loan is for, and the life of any assets purchased using the funds. For instance, maturity on working capital is 10 years, equipment 10 years, and real estate 25 years. Applications for SBA loans can often take months to complete, and the approval rate may be low.
Let’s explore three types of SBA loans.
1. 7(a) Loan Program
The SBA 7(a) loan program is the most flexible SBA loan, allowing you to take advantage of open-ended terms and qualifications. You can use the 7(a) loan program to cover business growth costs like purchasing equipment or real estate. However, qualifying for the 7(a) loan program is quite difficult for most businesses.
2. Microloan Program
SBA microloans offer funding up to $50,000. The average microloan is around $13,000. Microloans are commonly used by small businesses such as specific non-profit childcare centers. Businesses that receive the funds can use them for various business purposes, including working capital, stocking inventory, necessary fixtures or furnishings, or upgrading equipment.
3. CDC/504 Loan Program
The SBA CDC/504 loan is a business funding option for those looking to expand their already existing business. For example, if you need to expand or renovate your restaurant space, purchase a larger warehouse space, or make large equipment purchases, the CDC/504 loan program might be a good fit. Like the SBA 7(a) loan, you can borrow a high amount with a payment schedule that stretches up to 20 years. But, competition for this type of loan can be high which can make it difficult for smaller businesses to get approval.
SBA Loan Requirements
To get funding via an SBA loan, banks and other financial institutions will look at the 5-Cs to determine your eligibility:
1. Character: This is simply an analysis of how you managed your previous loans, both business and personal. Financial officers will also look at your business experience.
2. Capacity/Cash Flow: To secure an SBA loan, you’ll need to have enough financial history to prove to lenders that your business generates the necessary cash flow to repay the loan. Lenders might look into your financial statements, credit score, and any borrowing history.
3. Collateral: This is an important factor when assessing the risk of the loan being repaid. If you don’t have the funds to repay the loan, lenders will look to your hard assets such as real estate or equipment to repay the loan.
4. Capital: This is the amount of your own money invested into your business. In general, the ability to show you have some of your own capital invested into your business proves to potential lenders that you have “skin in the game.”
5. Conditions: This refers to the state of your business and what you’re hoping to use the funds for should you be approved for a loan. Lenders will assess how well your business is performing and weigh other outside economic factors to judge whether or not approving you for a loan would be favorable.
Advantages of SBA Loan Funding
One of the most appealing benefits of an SBA loan is the long repayment schedule. It provides business owners with the time they need to get cash flow moving in the right direction for those that can wait for results.
Disadvantages of SBA Loan Funding
The in-depth process required to get an SBA loan can be a pitfall for some business owners. The level of scrutiny and numerous requirements results in the SBA approving a limited number of loans each year. Moreover, in 2019, the SBA reportedly approved 63,000 loans. With the number of small businesses estimated at over 31 million, 63,000 is a small selection.
Another pitfall of SBA loan business funding is turnaround time. Getting an SBA loan can take up to six months and requires a lot of documentation. Your business and personal credit history will also be important factors in the approval criteria. And since the payback period is usually longer, your business can be burdened with debt much longer than with a short-term funding solution.
If you decide to submit an SBA loan application but need short-term financing options while you await SBA approval, you may want to consider a short-term funding option. Mulligan Funding offers an SBA bridge loan product built specifically for this need.
Other Business Funding Options
Friends and Family
Some business owners look to their friends or family for additional funding to help support their business.
But, this funding option might not be as simple as one would hope. Your passion alone may not close the deal. Like lenders and investors, friends and family want to see that their investment is in good hands and has monetary potential.
Advantages of Friends and Family Funding
One of the major benefits of tapping into friends and family for business funding is they are easily accessible, and they may already believe in you and your venture. They’re also usually less demanding when it comes to financial projections and other qualifications that banks would expect you to meet.
Disadvantages of Friends and Family Funding
Like any business funding, issues can arise. For instance, if the loan repayment becomes difficult or impossible, it could cause a strain on your personal relationships. In this case, the old adage, “Never mix family and business” might apply. Another downside to this type of funding is the number of people you need loans from. The chance of one friend or family member having all the funds you need is rare.
Another potential issue with this type of funding is the potential for an IRS audit for your friends and family, as well as your business. The IRS may want to see documentation on the loan, including interest rates. If you don’t set up interest rates, the IRS may ultimately see it as a gift. If business sours after a friend or family have loaned you money and the IRS categorizes the loan as a gift, your friend or family member won’t be able to claim a non-business bad debt deduction.
Acquiring funding from friends and family has benefits, but a fracture in personal relationships and IRS audits may make this type of business funding more trouble than it’s worth in the long run.
Enlisting angel investors as a source of business funding can be beneficial in helping grow your business. What is an angel investor? They are financiers who meet the Securities Exchange Commission’s investor standards of a minimum net worth of $1 million and an annual income of $200,000 or more.
Angel investors often seek out entrepreneurs who are launching a new business in an untested market. Due to the nuances of these entrepreneurial endeavors and the stage of their business, it can be difficult for entrepreneurs to get funding elsewhere.
Enter the angel investor. He or she will provide the funding the entrepreneur needs to develop a business idea in exchange for an equity stake in the company. Meaning they have a stake (ownership) of your business, including profits.
Angel investors can only invest up to a certain dollar amount, which is determined by their income and net worth. But, even when limited by those factors, angel investors typically take anywhere from 10% to 50% of the business. The “angel” in angel investor is often two-fold. Yes, angel investors provide funding to entrepreneurs who otherwise don’t have many funding options. However, they are all about opportunity. This means they want a large share of the business and a significant say in how the company runs.
Advantages of Angel Investor Funding
Angel investors can bring more to the table than just funding. They often have connections to corporate entities in your industry that can help grow your business. The experience they have can also be beneficial to the development and growth of your company.
Disadvantages of Angel Investor Funding
Another risk you take when dealing with an angel investor besides the large stake they acquire in your business profits is control. Since they have significant ownership in the business, they also get a say in how the business is run, and their goals may not always match yours. Before you work with an angel investor, it is important to understand all of the terms of the agreement you sign to obtain funding from them.
Venture Capital Funding
Venture capital funding is highly competitive with a focus on turning businesses into very profitable corporations. Venture capital funding is sought from venture capital firms comprised of a group of investors.
In addition to larger amounts of money, venture capitalists typically provide more than just monetary resources. They also can support your business with more technical expertise or even managerial knowledge. Depending on where you see your business heading, working with a venture capitalist and giving up equity in your company may not always be the best choice.
Advantages of Venture Capital Funding
The main advantage of venture capital funding is big-picture growth. A highly successful business ready to franchise into a national or global corporation can benefit from this business funding option. High growth and profits are associated with venture capital funding. However, venture capitalists often look for a business on the edge of explosive growth to get the funding and benefits.
Disadvantages of Venture Capital Funding
Business owners that work with a venture capitalist can give up more shared equity than they’d like. Giving up a large portion of your company is a definite disadvantage to venture capital funding. Stakes can increase more than you’re comfortable with depending on the venture capitalist you work with.
The industry is also important to most venture capitalists. According to recent research, some industries attract more interest from investors than others such as the following:
1. Internet and Software Service
2. Industrial Manufacturing
3. Developing Biotechnology
4. Space Exploration
5. Security Defense
Unless your small business falls into one of these booming industries, the odds of attracting the interest of a venture capitalist decrease. In general, these investors are interested in new businesses on the cusp of soaring to great heights and are not always looking to invest in businesses that might succeed on a smaller scale.
Crowdfunding is a business funding option that allows you to connect your business with people worldwide via online platforms. People contribute money to your goal in exchange for rewards. For instance, you can offer a product as a reward for a specific monetary contribution, depending on your product price points. The idea is to give them a value or discount for backing your business.
Crowdfunding is very project-oriented. A successful crowdfunding campaign centers on the development of an interesting new product or service. However, getting business funding through crowdfunding requires a lot of work. A successful crowdfunding campaign might involve:
- High-Quality Visuals: You need to make your business and products enticing. To do so, you may need to hire a professional photographer to take your product photos. Visuals and graphics need to be powerful and include prototype mockups when possible.
- Powerful and Compelling Message: Having a powerful and compelling message, mission, and business plan can help gain financial support.
- Social Media Campaign: The success of a crowdfunding campaign relies heavily on social awareness and reach. This means promoting your campaign with social media ads, joining Facebook groups, launching YouTube videos, and more.
- Enticing Rewards: Most crowdfunding backers are not simply contributing just for fun. They want a return like any investment, and this means having valuable rewards in place for different levels of contributions.
As outlined above, crowdfunding campaigns can be demanding to set up, manage, and promote. However, there are some advantages.
Advantages of Crowdfunding
The major advantage of crowdfunding to fund your business is that anyone can do it. Depending on the platform you choose, it can be free to create a crowdfunding page and receive funds from enthusiastic contributors.
Unlike traditional bank loans, the business funding you receive from crowdfunding is interest-free. The only cost to you is the rewards you put into place. Crowdfunding is also a great marketing tool, serving as a way to get your products in front of a large audience.
Disadvantages of Crowdfunding
Unfortunately, most crowdfunding platforms take a cut of your funding goal. Depending on the platform you use, some resources can take up to 5% of your funding goal if it’s reached.
If you don’t reach your funding goal, all of your funds may be returned, depending on the crowdfunding platform you use. Similar to any other funding option, it’s important to understand the fine print before you get started.
You’ll also need to be sure you meet the requirements to begin crowdfunding. For example, the Securities and Exchange Commission (SEC) limits how much money you can risk with crowdfunding, which is determined by your annual income.
Popular Business Funding Choices
Many business owners often choose the following two options for their business funding, working capital loans and business lines of credit. With the inherent limitations and issues with other funding options, alternative lenders have stepped in to supply business owners with the capital they need to run and grow their business.
Let’s take a deeper look into these powerful business funding options.
1. Working Capital Loans
Working capital loans can usually be obtained within 1-2 business days*. With a relatively seamless application compared to other funding options, a working capital loan application can be completed and approved in as soon as a few hours, with funding the business day after approval*. Imperfect credit is okay. No collateral is required. And unlike some large, traditional bank loans, the loan proceeds can be used for any purpose1.
Working capital loans provide business owners the cash they need for day-to-day operating costs such as payroll, rent, vendor payments, tax bills, and more. They’re also frequently used to offset slow account receivables, seasonality, and unforeseen expenses common to most businesses.
Working capital loans are also favorable options for businesses primed for growth. You may be ready to add staff, upgrade facilities, expand your product line, or repair or replace outdated equipment. This funding choice provides a quick and flexible way to invest in your business’ growth without the disadvantages of other lending sources.
2. Business Line Of Credit (LOC)
Choosing a business line of credit (LOC), also known as a revolving line of credit, lets you draw from an approved amount of funds whenever you need it. One of the biggest benefits of a LOC is that you only incur a fee on the funds you use, not the total amount that you’re approved for.
For example, if you’re approved for a $100,000 line of credit, you can draw $20,000 to increase inventory this month. Then, draw $10,000 for equipment upgrades next month. You’re not limited in how you access or use the proceeds from this funding option.
Another benefit of a business LOC is that your limit is replenished after repayment of the funds you used. A LOC is an exceptional option for a business owner looking for a flexible funding option for anything that comes up.
When it comes to top business funding options, a business line of credit gives you the freedom to manage funding as needed. A LOC also provides a layer of security to help you react to business circumstances as they arise.
Finding the best financing option for a business can be the difference between success and failure. At Mulligan Funding we believe that a lending partner should provide fast and friendly service as well as support from a dedicated team of advisors every step of the way through the funding process.
If you’re interested in discussing your financing options, call Mulligan Funding today at 855-326-3564. We look forward to partnering with you and your business!
The information shared is intended to be used for informational purposes only and you should independently research and verify.
Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.