Business Planning & Financing

Financing Options for Small Business Owners

Sooner or later, most small businesses find they need financing, whether to fuel growth or resolve a cash flow gap. When deciding which funding avenue might be right for your business, it can be helpful to become familiar with options besides traditional bank loans. Some financing avenues you can consider are outlined below, including:

  • Loans from friends and family
  • Credit cards
  • Government loans
  • Alternative or online loans

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 business. Before accepting loans from friends and family, consider the pros and cons.

Advantages
Low Interest Rates
Because new businesses are unproven, financial institutions may charge a higher interest rate for small business loans. A potential benefit of borrowing money from friends and family (regardless of whether it’s to launch a new business or to support an existing one) is that they may offer a lower interest rate than a conventional bank.

Flexible Repayment
Friends and family may be more flexible if a repayment is delayed, which a traditional bank usually won’t allow without a fee.

Approval Rates
In general, friends and family probably won’t evaluate your business in the same way a bank will.

Disadvantages
Awkwardness
By accepting a loan from family and friends, you may be opening up your personal finances as well as how you run your business to scrutiny.

Tax Issues
Going outside of a financial institution 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 instead of being categorized as an investment. To protect everyone’s interests, it’s advisable to use a lawyer to make sure all agreements are in writing and terms for loans are clear.

Contract Confusion
In addition to tax issues that may occur with a “friends and family” loan, your loved ones may assume they have a right to interject their opinion about how the loan should be spent or how the daily operations should function. Working with a business attorney to write up the legal paperwork that outlines the terms and conditions of the loan can help alleviate any confusion.

Credit Cards

Credit cards can be useful when used responsibly.

Important to know: Two types of rates associated with credit cards:

  1. Introductory Interest Rate — Credit card companies will often 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 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 funds. A big consideration to a credit card advance is that you’ll almost always have to pay a cash advance fee as well as upward of 24 percent interest on the amount borrowed. And usually, there isn’t a 30-day grace period on these advances like there is with regular credit card purchases.

Advantages
Better Approval
In many cases, larger banks may opt to give small business owners large lines of credit with a credit card versus a business loan. As a result,, credit cards can offer higher approval rates for small business owners compared to other funding options.

Flexible Spending
Using credit cards to fund your business means you can purchase equipment, inventory, and office supplies as you deem necessary. Unlike a loan, you don’t have to take out a lump sum at once and pay interest. Instead, you can purchase as you need and pay interest on the funds you use rather than on the whole amount.

Disadvantages
High Interest Rates
Business credit card interest rates can be close to three times the interest rate you’ll pay with an SBA loan. So, using a credit card to pay for large purchases that cannot be paid off within the 30-day grace period usually makes it an expensive loan.

Commingling Credit
If your business credit card is paid late, or if you’re carrying a high credit card balance, it can have a negative effect on your personal credit.

Business Debt
When not managed successfully, there’s a risk of going into 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.

Financing-Options-Body

Government Loans

Government loans are offered by banks and they are backed by the Small Business Association (SBA).

Three types of popular government loans are:

  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. The 7(a) Loan Program — Business owners who qualify for the 7(a) Loan Program can use the money to start, acquire and expand a new business. You must apply to a government-backed loan in conjunction with a bank’s participation.

While these are popular loan programs, check the SBA website for a complete list of all their offerings.

Advantages
Lending Terms
If a business meets the requirements associated with a 7(a) government loan program, it can receive up to $5 million in funding. This money can be allocated for equipment, real estate, and working capital, among other uses. SBA-backed government loans may have longer repayment periods than other funding options.

Disaster Coverage
Another benefit of an SBA loan is that it includes disaster loans, which allocate funds to business owners to help replace or repair damage done in a disaster-declared zone.

Disadvantages

Loan Qualifications
Applying for an SBA-backed government loan usually requires you to meet more qualifications and provide more information than traditional business loans.

Time Frame and Experience
In general, government loans rely on more paperwork than bank loans and longer timeframes before approval. New businesses may not be able to obtain an SBA loan.

Spending Restrictions
The government often places spending restrictions on different types of business loans, and any restrictions are usually closely monitored.

Alternative or Online Loans

Alternative loans are known for having a fast turnaround time, less paperwork, and a higher rate of approval for small businesses. QuickBooks Capital allows business owners to apply for a loan directly within QuickBooks. You can share your accounting and banking data from QuickBooks to fill in some of the information required on the application, saving you time in finding funding options that might be right for you.

Advantages
High Approval Rate
It’s can be difficult and time-consuming to get a loan through a traditional bank. Alternative lenders, however, are usually more likely to approve loans for small businesses without a lot of credit history and not as much paperwork.

Less Paperwork
Because the application process is done completely online, there can be a lot less back-and-forth than going to a bank and filling out a stack of forms. With QuickBooks Capital, you don’t need to compile your accounting history, for example, because your QuickBooks data will automatically transfer over to the loan application.

Less Time
An online loan, like one through QuickBooks Capital, takes less than an hour and if approved, you may be able to get the funds within a few days.

Disadvantages
Higher Interest Rates
Alternative lenders sometimes have higher interest rates than their traditional bank counterparts.
No matter what you decide to pursue for additional funding for your business, research will help you make an informed decision for your business needs.

Other Options for Obtaining Funds Fast

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.
  • Provide a discount for early payments.
  • Require a deposit before rendering services.
  • Bill immediately upon completion of service or product delivery.
  • Set and communicate firm payment due dates and any late payment policy.

Knowing your non-bank financing options can help you make an informed decision about the next step for your business.

Chapter 7.
Finance Your Business the Smart Way 5 min read
Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.