The unpredictability of cash flow can seem the most daunting challenge of all for bootstrapping small business owners trying to grow their empire. How can you predict upcoming expenses with precision, and where do you find the small business funding you need to succeed?
While many options exist for small business financing, every dollar counts, and sometimes even the best stewards of finance reach a point where they just can’t stretch their dollars any further.
Whatever the reason for your small business’s extra cash flow needs, we’re here to share the most affordable small business funding options available to you.
1. If you need help with short term cash flow
For businesses that just need a few extra days or weeks between invoicing clients and receiving client payments, or buying supplies and receiving revenue, a business credit card may be the answer.
However, this option can also be a slippery slope. Credit cards often come with high or higher interest rates for new businesses without a credit history, and even a single late or missed payment can adversely affect your company’s credit score. However, if your business has its costs under control and you’re certain that you can avoid carrying a hefty monthly balance, this option could be for you.
2. If low interest rates are your priority
The U.S. Small Business Administration (SBA), is known for its long-term, low-cost loans for entrepreneurs that are just starting out. SBA loans have very attractive packages for small business owners, allowing them to borrow money and pay it back at set rates. SBA loans offer interest rates as low as 6% and for loans from $500 to $5,000,000.
The SBA is not a lender, so it doesn’t loan money to businesses. However, the agency incentivizes lenders to loan money to small businesses. Lenders enjoy a lower risk for a higher reward while borrowers receive better rates and less paperwork than traditional outlets.
This loan type is best suited for a company who knows the loan amount needed, wants the consistency and reliability of a set schedule of payments, and is able to wait for the SBA’s lengthy approval times. Keep in mind that this loan application will involve more paperwork than others, so prepare yourself for the process.
3. If you’re willing to share equity
For companies who don’t want the risk or responsibility of carrying debt, equity financing through angel investors or venture capitalists may be a solution. Equity financing is a completely different structure in which you trade an ownership stake in your business for money up front. This means that you’d need to be willing to give up either a portion of your business or future profits in order to get funding.
Angel investors are individuals who participate in startup ventures to increase their income, give back to other entrepreneurs, and advance to the next level of entrepreneurship.
As typically more established organizations, venture capital firms fund larger-scale ventures by purchasing a percentage of the business.
If you have the fortune of being well-matched with an investor, you could be adding cash to your balance sheet as well as smart, savvy, well-connected mentors to your entourage of resources.
However, not all small business owners are suited for equity financing. Differing priorities or clashing personalities can make the capital injection more trouble than it’s worth.
Plus, equity financing can be highly competitive and it often has high barriers to entry, as it’s typically best suited to companies requiring investments in the million dollar range. Still, it’s an avenue worth exploring for many small businesses.
4. If you can lean on friends and family
The concept of mixing business with pleasure is not for everyone, but with the right planning, preparation, and communication, financing your small business through friends or family members can work for both sides. Lending from personal contacts can help you avoid many of the costs associated with traditional small business funding options. It can also help you strike a deal with more comfortable terms.
The risk, of course, has potentially dire consequences. The best way to manage any awkwardness from friends and family financing is to approach the lending agreement the same way you would with a traditional lender, including a full contract with explicitly detailed terms for each side. This will help facilitate communication and understanding before any money changes hands.
You’ll want to write out terms for how the loan will be paid back, in what amounts and over what period of time. If it’s an equity partnership, confirm the percentage of ownership or profit share, as well as the role your investor will have in future business decisions. Even if you think everyone is already clear on the terms, always put the details and agreement in writing so there is no room for confusion down the line.
No matter which path you choose, it’s important to do your research and know exactly what you’re getting into before pursuing any form of small business funding. That way, you are confident about what you are entering into and can make a longer term plan for growth, repayment, and future expansion of your business.
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business.