En español | Banks and government agencies such as the Small Business Administration (SBA) can be a vital resource for entrepreneurs who need money to launch their business or keep it afloat. But sometimes the options these institutions offer may not be the right fit for your operation.
The good news is that, beyond lending from commercial banks and the SBA, small businesses have other avenues they can take to get funding. Finding the right source may “depend on a variety of factors,” including the size of your company, your industry and your location, says Wayne Lorgus, senior partner at B2B CFO, a Mesa, Arizona–based firm that provides cash-flow and management strategy services to privately held companies.
If you're seeking money for your business and want to consider options beyond bank loans, here are some possibilities.
Grants can be the perfect combination, providing cash that can help your business and that you don't have to pay back. That's why even though grants can be hard to come by, they're worth exploring, especially as more industry and economic development groups are trying to help businesses affected by the COVID-19 pandemic.
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"What I'm seeing a lot more of now is these locally sourced programs, figuring out how to inject capital right to local businesses,” says Roy Lamphier, founder and CEO of Excelerate America, a Detroit-based organization that helps small and medium-size businesses (SMBs) grow. One of the organization's offerings is a local funding finder, which can help small-business owners locate grants and other funding sources.
The following websites let you search for a variety of grants.
- Economic Development Authority: State and regional economic development agencies and resources have a wide range of programs, including some grant options, depending on the area. While the listing of latest grant opportunities can be unwieldy, the organization has a handy map that links to state and regional resources that you can contact directly for information.
- Grants.gov: This massive website lists federal grant opportunities, including those offered to SMBs.
- GrantWatch: A privately owned compilation of grants, it allows you to search specifically for SMB opportunities.
- State Business Incentives Database: Featuring grants, tax incentives and other state-level opportunities, this database is compiled by the Council for Community and Economic Research.
In addition to grant databases, Lamphier says other places that provide or can help you look for these funds are trade associations, chambers of commerce, and small-business development centers. Some large corporations, including Facebook and FedEx, are also offering grants to small businesses.
There are a variety of private grant sources, too, ranging from the National Association for the Self-Employed, which offers members a chance to land $4,000, to WomensNet, whose Amber Grants are awarded to women in business.
It's not uncommon for people to use credit cards to finance their businesses, but there are benefits and drawbacks, Lorgus says. While these credit lines may be easy to obtain — some with credit limits of $50,000 to $100,000 — the interest rates and fees can be expensive. What's more, if you are not careful to use the card only for business expenses, the IRS may take a dim view of your bookkeeping and tax-deduction records.
It's also important to be aware of the difference between business and personal credit cards. Although you may get offers for business credit cards, you will likely still need to sign a personal guarantee to obtain one. Plus, business cards may not provide the same protections as your personal cards. Small-business cards may come with higher interest rates and fees and lack purchase and fraud protections, among other issues. Be sure to read the fine print before choosing this option.
Just as social media has changed the ways we connect and communicate, social funding options have created new avenues for small businesses to obtain money. “With the rise of crowdfunding and peer-to-peer lending, now more than ever, your network becomes super important as it relates to accessing capital,” Lamphier says.
There are typically two types of crowdfunding sites. Those like Kickstarter and Indiegogo allow you to raise money by accepting pledges from the public. Often, these programs are structured like a product presale, with funders receiving tiered product or gift offerings commensurate with the amount they give. Equity crowdfunding sites such as Wefunder and AngelList allow small companies to offer and sell securities via crowdfunding. These entities are regulated by the Securities and Exchange Commission and must abide by strict rules.
Either way, crowdfunding can generate cash for your small business, but it's a good idea to work with your accountant on a plan. If you promise goods in exchange for funding, you want to make sure you can deliver. And it's important to understand the implications of selling equity in your company, Lamphier adds.
Beyond banks, there are other financial firms interested in enticing you to borrow from them. Fintech companies, including Kabbage and PayPal, and others have gotten into the lending game, providing information about, and access to, different lending products, depending on the customer's needs. For the time being, some are focused solely on providing Paycheck Protection Program (PPP) loans.
You should, however, be aware of the conditions and terms of non-PPP loans from alternative lenders, Lorgus advises. “The terms can be pretty steep,” he says. “The lender will often pitch the loan in terms of, ‘It's just 2 percent per month.’ But 2 percent per month times 12. Obviously, you're talking about some pretty expensive money.” Lorgus recommends using online calculators to determine what the true cost of the loan would be.
Attracting private investors to your company can be another way to raise funds. But angel investors, private equity firms and venture capitalists generally are looking for fast-growing companies they can take public within a few years, Lorgus says. Investors can also include friends and family, who may have different expectations about performance; thus, the terms of any agreements should be spelled out in writing. After all, you don't want misunderstandings about money to jeopardize your personal relationships.
There are certainly many options when it comes to funding a small business. Figuring out the right one requires careful investigation. In most cases it's a good idea to involve your accountant in the process. That way, you can get a second opinion on your options and the consequencs of your choices.