It is a familiar scenario with two very different endings. You have an outstanding product or service (or both), and an eager customer base that would repeatedly hit the buy button or send in a steady stream of purchase orders. So what is the problem? Like many entrepreneurs running a young start-up, you do not have the cash you need to turn your small business dream into a living, and profitable, reality.
The first ending to this common tale is risky, stressful, and usually does not end well. Entrepreneurs cash in their life savings (retirement plans, equity in their home, insurance policies), sell personal assets (for example jewelry, family heirlooms), and run through at least one friends-and-family round of financing that, alas, is met with reactions like: “Well, I would love to help, except I have to get the kitchen redone and Laura might need braces. How about we see how things look next year?”
Then there is the other ending, which is far more encouraging. Entrepreneurs hold onto their life savings, personal assets, and their dignity (everyone knows Laura does not need braces), and instead get the cash they need by tapping into one or more of the following sources.
1. The Small Business Administration (SBA)
The SBA offers multiple loan programs geared toward different types of entrepreneurs (based on demographics, geography, industry, and more). The good news is that many SBA loans have relatively low interest rates, and the payback duration can run several years. A few stretch beyond ten years. That keeps your monthly payments low, which is critical when cash is tight and every dollar has a job to do.
The bad news is that competition for SBA loans is fierce, and the annual funding pool is usually dry by about September each year. The application burden is heavy, and the process can take several months. Some SBA loan applications take more than half a year to work their way through dozens of loan officers and administrators. If you go this route, start early, keep your paperwork organized, and be ready to answer follow-up questions promptly.
2. Banks and credit unions
You probably already know that banks and credit unions offer small business loans. You may also know that the eligibility requirements are quite high. Applicants typically need excellent personal and business credit scores, plus at least two years of verifiable operational history, which is an insurmountable obstacle if you are a start-up without a past.
Much like SBA loans, banks and credit unions are in no hurry to process small business applications, not when they have larger, more profitable enterprises to focus on. Expect the process to take at least a few months, and the application package to be sizable. You will need your credit scores, business plan, resume, cash flow statements, and tax returns, among other documents.
One thing worth doing before you apply: build a relationship with a local branch or credit union rather than treating the loan as a cold transaction. Bankers lend to people they understand, and a lender who already knows your business, has seen your accounts, and can put a face to the numbers is more likely to advocate for your file when it lands on a credit committee’s desk.
3. Alternative financing
Alternative financing is a marketplace where private lenders (neither banks nor credit unions) provide individuals and businesses with various loans: working capital financing, business lines of credit, merchant cash advances, equipment financing, and more. There are multiple products available, each suited to a different need.
In the alternative financing space, application requirements are much easier to meet. Some lenders do not insist on good credit or years of business history. Even a past-discharged bankruptcy or an open tax lien is not necessarily a deal breaker. Some firms also run specialized programs for particular groups, such as women entrepreneurs and loans for Veterans.
The trade-off is cost. Because these lenders accept more risk, their rates and fees are usually higher than what a bank or the SBA would charge, and some products (merchant cash advances in particular) can carry an effective annual cost that surprises borrowers who only read the headline number. Read the full repayment schedule, calculate the real cost of the money, and confirm the lender is legitimate before you sign. Because these firms range from established names to fly-by-night operations, spend an hour verifying who you are dealing with. Look them up in a curated business directory, check independent reviews rather than the testimonials on their own homepage, and confirm a real address and track record. Independent listings tend to be more revealing than seller-hosted ones. A meta-analysis by Kristopher Floyd and colleagues, “How Online Product Reviews Affect Retail Sales: A Meta-analysis” (2014), found that reviews hosted on third-party websites produce greater sales elasticities than reviews on a seller’s own site, which is a useful reminder that outside verification carries more weight than anything a company says about itself.
4. Crowdfunding
I am ambivalent about including crowdfunding on this list, but if I left it off you might wonder whether I made an error, so I will include it with some important qualifications.
Crowdfunding, as the term suggests, is a way to raise money by soliciting small contributions from a large pool of people. Typically these people are not investors, and they are not donors either. Instead, they are buying a product or service based on the amount they pledge (these are usually called “tiers”).
The good news with crowdfunding is that almost anyone can launch a campaign with minimal start-up costs. Ironically, that is also the bad news. Competition for crowdfunding dollars is ferocious, and for every “front page of WIRED” success story, there are thousands of campaigns that failed to generate more than a few hundred dollars, most of it from friends and family.
Success on these platforms depends heavily on being found and trusted by strangers. Rachel Botsman, in “Who Can You Trust?” (2017), describes a shift toward what she calls distributed trust, in which ratings, reviews, and platform reputation systems let people extend confidence to businesses they have never met. A backer deciding whether to pledge to you is doing exactly that, and your credibility signals (a clear story, an honest budget, evidence you can deliver) do most of the persuading.
If you do decide to try crowdfunding, my advice is not to treat it as your primary funding source. If you catch lightning in a bottle, adjust accordingly and smile until your cheeks hurt. But if you pin the survival of your start-up on whether you strike crowdfunding oil, you may be on track to write an obituary instead of a success story.
The bottom line
Small business success requires vision, persistence, dedication, and sacrifice, plus enough cash to make it happen. Before you commit to any one source, do the math on total cost, timeline, and what you are giving up, whether that is equity, collateral, or several months waiting on an approval. Any of the funding options above could be the solution that gets your small business off the ground and to the top of your marketplace. Match the source to your stage: the SBA and banks reward patience and paperwork, alternative lenders reward speed at a price, and crowdfunding rewards a compelling public story. Pick the one that fits where you are, and keep the others in your back pocket. Good luck.
