Finding the best funding sources for your small business depends upon many factors. Perhaps the key to determining the right capital for your small business is which stage of growth your business is in. As you move from start up to growth stage, your small business financing needs and the funding sources available to you change. Here at Excelsior Growth Fund (“EGF”), we call that “moving up the capital continuum.” Regardless of what stage your business is in, this article will help you figure out the best options for funding your small business.
In the startup stage of a small business, your capital will most likely come from equity sources. Equity should be viewed as a long term investment in your company that does not bear interest and generally does not have a specified repayment schedule. Generally speaking, equity funds have little or no restrictions on what they can be used for. Equity sources include:
- Personal savings
- Family or friends
- Angel investors or venture capitalists
Pros: Low cash outlay (e.g. no interest or repayment), flexibility in use, ability to plan for long term growth
Cons: Pressure on your personal savings, stress on family/friend relationships, loss of full ownership of your business (if using angel investors or venture capitalists).
Once your business is established, you will undoubtedly need capital to grow revenues, or to expand to a second location or even make an acquisition. However, you may not be eligible for a traditional bank loan because you do not have a track record, or maybe you are in a high-risk business such as a restaurant. The good news is that there are a large number of non-bank (“alternative”) lenders willing to provide you with capital. The bad news is that not all of these alternative lenders have your best interest in mind!
Alternative lending companies offer loans for early stage small businesses in need of quick access to capital. These lenders rely on your incoming revenues, debit/credit card receipts and/or the collection of receivables for the repayment of their loan. They are not subject to banking regulation and so can charge extremely high interest rates and fees and do not follow the same disclosure rules to consumers. Sources of alternative loan products include:
- Factoring of customer accounts receivables
- Merchant cash advance of debit/credit card receivables
- Online loans
Pros: Quick approval/processing time, lower credit standards, quick access to funds
Cons: High interest cost & fees (APR: 30% to80%), daily/weekly automated debit repayment, short repayment term, lack of clear disclosures on costs/fees.
We encourage you uncover the true cost of different loan types by calculating the annual percentage rate (APR) for each option. This will give you an apples-to-apples comparison of your options. We invite you to check out related articles in our Resource Library on the true cost of Factoring, Merchant Cash Advance, and a typical Online Loan. You might be surprised to learn of the “true” cost of different small business loans!
The good news is that there are also mission-driven alternative community lenders that offer small business financing. For example, Community Development Financial Institutions (“CDFIs”) are not-for-profit lenders, certified by the U.S. Department of the Treasury, whose mission is to promote economic growth by supporting the small business community. CDFIs can be banks, credit unions, loan funds, microloan funds, or venture capital providers. Common types of loans offered by CDFIs include:
- SBA Community Advantage Loans – Similar to the SBA 7(a) loan (see below), this program is designed to help underserved communities get access to funding for working capital, equipment, refinancing debt, etc.
- Microloan Program – Typically under $50,000, this type of loan can be used by startups for working capital or to purchase inventory, supplies, or equipment (it cannot be used to purchase real estate or to refinance existing debt
Pros: Flexible terms tailored to meet small business needs, more flexible underwriting criteria, interest rates below ‘typical’ alternative products, longer repayment terms, advisory services
Cons: Interest rates above other SBA loan products, small average loan size, slower loan processing time than online applications.
Another alternative community lending source are Small Business Administration (“SBA”) lenders. This group consists of traditional commercial banks, non-depository banks and CDFIs. These lenders can offer commercial loans to higher risk small businesses because the SBA provides a guaranty in case the borrower cannot repay the loan. SBA loans can be used by small businesses that are just starting out because the lenders will look at projections as well as actual financial results. In addition to microloans and Community Advantage loans, other types of SBA loans include:
- 7(a) general small business loans – Formally called the 7(a) loan, this is the most common type of SBA term loan suitable for most businesses. It can be used for a variety of purposes, such as working capital, equipment, refinancing debt, etc.
- 504 loans – This type of SBA term loan can be used to purchase real estate and equipment and to modernize or renovate business space at very affordable rates
- CAPLines loans – Lines of credit used to help businesses meet short-term and seasonal working capital needs and fulfill contracts and purchase orders.
Pros: Interest rates lower than alternative loan products, longer repayment terms, start-ups are eligible, lends on cash flow
Cons: Extensive loan documentation, longer loan approval process
Established – Expansion Stage
Once your business is mature and you have reached the established-expansion phase of growth, your small business is likely on solid ground with predictable revenues and cash flow! Now is time to take advantage of your banking relationship by applying for traditional loan products with competitive interest rates and terms. At this stage in your business, you will likely qualify for loan offered by conventional banks. Consider refinancing any existing higher interest rate debt or get ready to fund your next growth plan. Traditional bank loan products include:
- Secured and unsecured lines of credit, used primarily for short term working capital purposes
- Term loans, used to fund the purchase of longer term assets such as equipment & machinery
- Commercial real estate mortgages, used to purchase buildings & property
Pros: Low interest rates, varying repayment terms, lend on cash flow or collateral
Cons: Requires business track record, strong personal credit scores, historical cash flow, varied approval process
If you are a small business owner who needs help navigating funding sources, we’re eager to help. We can walk you through the various loan options available to you based on your business needs and stage of growth. We can also help you learn more about Excelsior Growth Fund’s SmartLoan™, a small business term loan that offers the speed of an online process and the reliability of a nonprofit community lender.
About Excelsior Growth Fund
Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more atwww.excelsiorgrowthfund.org.