It’s 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 an ongoing stream of purchase orders. So, what’s the problem? Like countless entrepreneurs at the helm of a dynamic start-up, you don’t have the cash you need to turn your small business dream into living — and indeed, profitable — reality.
Now, the first ending to this common tale is risky, stressful and usually doesn’t end well: entrepreneurs cash in their life savings (retirement plans, equity in their home and insurance plans, etc.), sell personal assets (e.g. jewelry, family heirlooms, etc.), and run through at least one friends and family round of financing that, alas, is met with reactions like: “well, I’d 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?”
And then there is the other ending, which is far more inspiring: entrepreneurs hold onto their life savings, personal assets, and their dignity (c’mon, everyone knows Laura doesn’t need braces!), and instead get the cash they need by tapping into one or some of the following sources:
- The Small Business Administration (SBA)
The SBA offers multiple loan programs geared towards different types of entrepreneurs (demographics geography, industry, etc.). The good news is that many SBA loans have relatively low-interest rates, and the payback duration can be several years long — a few are even more than 10 years. This keeps your monthly payments low, which is critical.
The bad news is that competition for SBA loans is fierce, and the annual funding pool is usually dry by about September each year. What’s more, the application burden is quite heavy, and the process can take several months. In fact, some SBA loan applications take more than half a year to snake their way through dozens of loan officers and administrators.
- Banks and Credit Unions
You probably know already that banks and credit unions offer small business loans. However, you may also know that the eligibility requirements are quite high. For example, applicants typically must have excellent personal and business credit scores, and at least two years of verifiable operational history — which is an insurmountable obstacle if you’re a start-up without a past.
What’s more, much like SBA loans, banks and credit unions aren’t in any hurry to process small business loan applications — not when they have larger, more profitable enterprises to focus on. As such, expect things to take at least a few months, and for the application package to be sizable (you’ll need your credit scores, business plan, resume, cash flow statements, tax returns, and so on).
- Alternative Financing
Alternative financing refers to a marketplace where private (i.e. non-bank and non-credit union) lenders provide both individuals and businesses with various loans, such as working capital financing, business lines of credit, merchant cash advances, equipment financing, and so on. There are multiple products available.
While borrowing in the alternative financing space, the application requirements are much easier to meet. For example, some lenders don’t insist on good credit or years of business history. Even having a past-discharged bankruptcy or an open tax lien aren’t necessarily deal breakers. What’s more, some alternative financing firms have specialized programs for different groups, such as women entrepreneurs and loans for Veterans.
I’m ambivalent about including crowdfunding on this list, but since if I didn’t you might wonder if I made an error or oversight, I’ll include it — but with some important qualifications.
As you may know, crowdfunding is (as the term suggests) a way to generate funds by soliciting small donations from a large pool of people. Typically, these people are not investors. But they aren’t donors either. Rather, they’re buying a product or service based on the amount they pledge (these are usually referred to as “tiers”).
The good news with crowdfunding is that virtually anyone can start a campaign with minimal start-up costs. Ironically, this is also the bad news! Why? Because 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 (and all of that from friends and family).
If you ultimately decide to try crowdfunding, then my advice is not to treat it as your primary funding source. Yes, if you catch lightning in a bottle you can adjust accordingly (and smile until your cheeks hurt!). But if you pin the life or death of your start-up on whether you strike crowdfunding oil, then instead of a success story, you may be on-track to write an obituary.
The Bottom Line
Small business success requires vision, persistence, dedication, sacrifice — and of course, sufficient cash to make it happen. Any or all of the funding sources discussed above could be the solution you need to get your small business off the ground and to the top of your marketplace. Good luck!