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Financing Options for Small Business Owners

Sooner or later most small businesses find they need financing for one reason or another. This means, as a small business owner, you should be clear on your financial reports and know your options.

Small Business Financing Options

There are many different avenues you can take toward financing:

  • Loans from friends and family
  • Credit cards
  • Government Loans
  • Alternative or online loans
  • Conventional business loans
  • Lines of credit or working capital loans
  • Equipment loans

While all of these are possible choices, the first four are the main financing options that can be obtained without using a traditional bank loan.

Loans from Friends and Family

A popular avenue for obtaining funds is to get a loan from your family and close friends who may want to invest in your new venture. This is a common choice since only 39 percent of small businesses are approved for traditional bank loans, leaving advances from loved ones as the main way that small business owners are able to finance. Before accepting loans from friends and family consider the pros and cons.


Low Interest Rates

Because of the risk involved with starting a new business, most financial institutions will charge a higher interest rate for business owners to access the funds they need. This is one of the benefits of borrowing money from friends and family; they can offer a lower interest rate than a conventional bank. This option allows you to re-invest more money into your business and give it a chance to succeed.

Flexible Repayment

According to a study by U.S. Bank, more than 80 percent of small businesses that fail do so because of cash-flow issues. Not only does cash flow take into account money coming in and going out, but it also requires an understanding of timing. The amount of debt a business has is also a huge factor in cash flow, which helps make the case for accepting loans from friends and family. Loved ones are often more open to delaying a payment by a few days without charging you a late fee, something a traditional bank won’t allow.

Approval Rates

Another great advantage to getting loans from friends and family is that your loved ones will not assess your credit score like a bank will. You won’t have to jump through the same financial hoops to be approved for funding. Your loved ones want to help achieve your goals and see your business succeed, thus they will often lend you money in cases when banks have denied you.



One of the main problems with accepting loans from friends and family is that mixing money with loved ones can be the cause of stress around the dinner table. You may be unknowingly opening up your personal finances to the scrutiny of your loved ones as they judge your spending habits. A conventional financial institution does not have an emotional stake in your company, but your friends and family will and they may use this to question your decisions.

Tax Issues

Going outside of a financial intuition for business funding can complicate your tax situation. If not properly handled, accepting a loan from friends and family may be classified as a gift for tax purposes, versus being categorized as an investment. To protect everyone’s interest it’s important to follow the same procedure that traditional banks and credit unions take when setting up a business loan of any kind.

Contract Confusion

In addition to tax issues that may occur with a “friends and family” loan, there may be confusion around the clarity of the investment. Your loved ones may assume they have more rights to interject their opinion about how the funds should be spent or how the daily operations should function. To avoid further lack of clarity, work with a business attorney to write up the legal paperwork that outlines the terms and conditions of the loan.

Credit Cards

Credit cards tend to have a bad reputation as a means to finance a business, but they can do a lot of good when used responsibly. Before determining whether you should use credit cards to help fund your business, consider the pros and cons.


Better Approval

In many cases, larger banks such as Capital One and Bank of America will opt to give small business owners large lines of credit with a credit card, versus a business loan. This makes the case that credit cards offer a better chance of getting approved for funding so you can expand and grow your business. In short, credit cards usually offer higher approval rates for small business owners compared to other funding options.

Build Credit

In the event your business is brand new and doesn’t have a credit history of its own, you can use your personal credit score to obtain a credit card to use for business purposes. Most financial institutions don’t make a distinction between the business and the business owner, so this gives you the chance to further build your personal credit while establishing a credit history for your business.

Flexible Spending

An excellent advantage to using credit cards to fund your business is the freedom to purchase equipment, inventory and office supplies as needed. There are no limitations in terms of how you must use the line of credit, making credit cards an easy vehicle for purchasing inventory, balancing out the slow and busy seasons, as well as investing in much-needed equipment.


High Interest Rates

Business credit card interest rates can sit quite high (around 15%) on average. Because of this, using a credit card to pay for large purchases that can not be paid off within the 30-day grace period make it an exorbitantly expensive loan.

Commingling Credit

When applying for a credit card, most financial institutions will issue cards under both the business owner and company names. This can put your personal credit history at risk since you and the business are commingling credit. If your business credit card is paid late it can have a negative effect on your personal credit. Likewise, carrying too high of a credit card balance can cause your personal credit score to drop.

Business Debt

When not managed successfully, there’s a high chance of going into major debt when using credit cards to launch a business. The cost of credit card debt, and the interest associated with it, can eat away at a company’s profits. There are strategies to help business owners manage credit wisely. The smart thing is to keep spending to a minimum and pay down your balance in full.

Two types of rates associated with credit cards

  1. Introductory Interest Rate — To help business owners get a jumpstart on inventory and equipment needed for the business, credit card companies will offer an introductory interest rate of 0 percent for a period of 12 to 18 months. This means you can purchase a new $10,000 piece of equipment for your new bakery and won’t have to pay any interest for a year or more. The downside to this is you may be hit with the entirety of the accumulated interest if you’re unable to pay the full balance within this promotional time frame.
  2. Cash Advance Rate — A cash advance from a credit card allows you to get quick access to much-needed funds. You can use this to pay your employees or put cash in the till to help cover an extremely busy day. The major drawback to a credit card advance is that you’ll have to pay a cash advance fee as well as upward of 24 percent interest on the amount borrowed. And there isn’t a 30-day grace period on these advances like there is with regular credit card purchases.

Government Loans

Every year the government sets aside a certain amount of money to help small business owners finance their businesses. In many cases, these government loans are offered by traditional banks. This reduces the risk for the lender and provides better funding for the borrower. To fully understand how government loans work for small businesses, consider the pros and cons.

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Lending Terms

If a business meets the requirements associated with a 7(a) government loan program, it can receive up to $1 million in funding. This money can be allocated for equipment, real estate and working capital. SBA-backed government loans not only offer a large amount of funds for small business owners but also come with longer repayment periods. These favorable lending terms are sought after by business owners because they offer much more flexibility.

Loan Guarantees

SBA-backed loans are guaranteed by the federal government which equates to a higher chance of bank participation. If you default on your loan, the SBA promises to pay back a portion of the funds, so there’s less risk involved for the financial institution and more opportunity for you to be approved. If you’ve had trouble getting funding in the past, a government-guaranteed loan may be your best bet.

Disaster Coverage

Another pro to the government business loan program includes disaster loans, which allocate funds to business owners to help replace or repair damage done in a disaster-declared zone. Many new businesses face closure after experiencing a head-on collision with mother nature. But disaster coverage can help you get back on your feet with funds to repair any real estate damage, personal property, machinery, inventory and other business assets.


Loan Qualifications

Applying for an SBA-backed government loan usually requires you to meet more qualifications and provide more information than traditional business loans. They do this because they want to confirm your ability to repay the loan. Many of the terms rely on exactly how your business earns an income, the day-to-day operations and the character of the business owner. You’re also required to use your personal assets and equity to fund the business before seeking a government loan.

Time Frame and Experience

If you’re hoping to receive quick processing and funding, a government loan is going to leave you disappointed. Increased paperwork and hoops to jump through mean there’s often a much longer time frame for approval. In many cases your business must provide proof of two year’s worth of income after taxes, so a brand new business will likely not be able to take out a government loan.

Spending Restrictions

The government wants to ensure they will receive their money back so they often place spending restrictions on different types of business loans. For example, microloans of up to $50,000 are given out to aid in technology upgrades or refurbished office spaces. However, the terms of this type of government loan come with closely monitored use of the funds, and prevent you from using the money toward existing debts.

Three types of popular government loans

  1. Microloans — Microloans provide funds up to $50,000 to be spent on working capital, equipment, fixtures, furniture, inventory, machinery and other supplies for the business.
  2. Real Estate and Equipment Loans — The SBA offers Real Estate and Equipment Loans for construction of new buildings, purchase of real estate and improving existing structures and facilities.
  3. Other Loan Programs — You may qualify for a specific Loan Program in your country where you can use the money to start, acquire and expand a new business.

Alternative or Online Loans

Sometimes traditional banks won’t lend to small businesses because they don’t yet have a track record to prove they’ll be able to pay the money back. For this reason, online lending is a viable option available to those small businesses.


High Approval Rate

It’s often difficult to get a loan through a traditional bank. Alternative lenders, however, are more likely to approve small businesses without a lot of credit history.

Less Paperwork

Because the application process is done completely online, there’s a lot less back and forth than going to a bank and filling out a stack of forms.

Less Time

Applying for a loan from a traditional bank can result in up to 33 hours of paperwork. An online loan, may be quick to apply for and you could get the loan funding within a few days. This is nice when you need fast cash.


Higher Interest Rates

While it’s not true in every case, alternative lenders sometimes have higher interest rates than their traditional bank counterparts. These rates depend heavily on credit history and the amount of money you’re looking to borrow.

Requires More Research

No matter what organization you’re borrowing from, you should do thorough research. Since online lenders are relatively new versus big banks, you’ll need to ensure they’re established and reputable enough to stay in business. Go with a credible, well-known company. QuickBooks Financing works with curated lenders to help take the guesswork out.

Options to Get Cash into Your Business Right Now

If you need cash immediately, here are a few specific steps you can take as a small business owner to bring money in right now.

  • Require payment upon receipt. Make it your policy that customers who pay with credit cards must do so upon receipt of product or services.
  • Provide incentive for early and on-time payments. Offering a percentage off the final bill for early payment will help incentivize your customers to pay faster.
  • Require a deposit or advancement payment for services. Customers tend to expect this option as it has become an industry standard, so go ahead and enforce a deposit before rendering services.
  • Bill immediately upon completion of service or product delivery. Don’t let time lapse between completion of the project or delivery of the product. The longer you wait to request payment the longer it will take to receive the funds.
  • Set and communicate firm payment due dates. Be upfront and clear about payment terms and due dates. Enforce a late payment policy that customers will expect to comply with.
  • Use credit cards to pay vendor bills after 30 days. Lines of credit usually come with a 30-day grace period, leaving you with a month-long cushion to pay the bill.
  • Track your inventory carefully. Make sure you’re ordering more of the things that fly off the shelves and less of the things that sit for months and take up valuable shelf space and working capital.

Knowing your financing options can mean the difference between staying open for business or shutting your doors. Take the time to learn about your options whether it’s accepting money from friends and family, using credit cards to fund the business or applying for government loans.

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