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Finding Funding: 6 Options for Financing Your Company’s Growth
Posted by Sylvia Lagerquist, CPA
It’s time to add a new piece of equipment to the factory floor, or maybe you’re ready to buy an ideal plot of land for your new retail location. Perhaps you need a working capital loan to help you finance new hires, or maybe you’re looking to outfit a new commercial kitchen.
Regardless of the reason, there come key moments in the life of your business when you need to finance growth. For most small business owners, financing growth equates directly to applying for a commercial bank loan. And a traditional bank loan is a proven option you should consider – but it is only one of many pathways to evaluate when determining how to finance growth.
Here are six proven options you can consider when evaluating how to finance your business:
1. Traditional Bank Loans
The first option is to approach your commercial bank and apply for a term loan or a line of credit. The advantages of this approach are many, beginning with the fact that you have an existing business relationship with the bank and, depending upon the bank, you might be able to work directly with a loan officer or commercial banker who can guide you through the process.
The greatest obstacles to this approach are twofold. First, most banks tend to have conservative lending criteria and very restrictive lending requirements. And second, your bank might be quick, agile and personal in working with you through the approval process – or they might take your application and send it behind an impenetrable wall of steps, people and departments that leave you hanging for weeks (or longer) while awaiting their decision.
2. Credit Union Loans
Historically, credit unions were severely restricted in offering commercial loans, in part because they are nonprofit institutions whose legal charters limited them to serving a very narrow band of customers. Narrow customer groups make a poor foundation for building a diversified commercial lending portfolio, which further hindered credit unions in this area.
However, in the last fifteen years many credit unions have successfully petitioned to transition from a closed charter to a community charter, and in so doing, many of them were then able to bring a range of new commercial loan products to the marketplace.
The result, in some communities, is that credit unions may be able to offer highly attractive lending terms, coupled with the personalized service that many small business owners greatly appreciate. Of course, credit unions are by their nature limited in their market footprint, which limits their effectiveness for companies intending to grow geographically or in other ways, but nonetheless they are worth examining in depth.
3. Economic Development Loans
Chances are, you have heard of the U.S. Small Business Administration (SBA) and you likely know that some banks offer SBA-backed small business loans. But other than that, you may not be aware of just how many attractive financing products may be available through federal, state and local governments and their partners. Some of these products include:
- SBA Small Business 7(a) Loan
- SBA CDC/504 Loan
- USDA Business & Industry (B&I) Loan Guarantee
- EDA Revolving Loan Fund Program
- Community Development Financial Institution (CDFI) Loan
In addition, each state and many counties and cities also manage loan programs that target incumbent or expanding businesses in their jurisdictions. Make sure to visit these sites to learn more:
- Maryland Department of Business & Economic Development
- Washington, D.C. Economic Partnership
- Virginia Economic Development Partnership
4. Invoice Factoring
Another option for generating cash you can use to drive growth, especially if yours is a small, fast-growth company doing business with larger enterprises tend to pay slowly, is to use invoice factoring. Invoice factoring is the formal term for the transaction in which you sell your accounts receivable to another business, investor or financial institution, who then takes responsibility for collecting the money owed to your business.
You gain the advantage of cash up-front, which you can apply immediately to pay bills or finance growth. And, in many cases, factoring does not require a business credit check or assets backing the arrangement, since the factoring company’s primary concern is not your ability to pay but rather, your customer’s ability to pay instead.
The disadvantages can be considerable, however – starting with a high cost (often 20% of the face value of the outstanding invoices, plus a service fee) and continuing with potentially onerous terms and details. This is why you should read the fine print carefully when considering factoring companies, and feel free to negotiate any details necessary to meet your needs.
5. Online and Alternative Lenders
Kabbage. OnDeck. LendingClub. Prosper. FundingCircle.
The market for online and alternative small business loans has exploded in the past few years, creating a new opportunity for businesses seeking financing – and new challenges for business owners trying to select the best options.
The advantage to these services is usually a combination of simplicity and speed. Fill out the right online information through an online form, and you can secure an approval in as little as thirty minutes with some services.
Many of these services (Kabbage and OnDeck, for example) are online balance sheet lenders, which means in essence that they provide primarily short-term, working capital funding with terms of nine months or less. They often work in a manner similar to a merchant cash advance, wherein they deduct a percentage of revenue from your bank account directly over time.
Others, such as LendingClub, Prosper and FundingCircle among others, are built instead around a peer-to-peer model, backed by individual investors. Terms can often go much longer (up to three or five years, for example) and for larger amounts.
Still others, such as Fundera and Biz2Credit, create marketplaces between lenders and borrowers, which opens up a variety of options but can also complicate the decision process for the business owner.
Either way, the greatest disadvantage to these options is usually the cost of funds, which can be very high depending primarily upon your business credit and the nature of your balance sheet.
One option to consider is the U.S. Small Business Administration’s newly-launched SBA LINC service, which is a matchmaking platform designed to connect borrowers and lenders for loans up to $5M and with terms up to 25 years.
More information on SBA LINC is available at: https://www.sba.gov/tools/linc
6. Business Crowdfunding
Finally, there is the newly emerging field of small business crowdfunding. Best known through product-oriented startup crowdfunding sites such as Kickstarter and Indiegogo, this option has now expanded to encompass options for other kinds of companies through services such as FundRazr and Fundable.
Crowdfunding is a rapidly changing field and it comes with great pros and serious concerns at the same time. Services like ZapCap allow companies to focus on crowdfunding efforts targeting their existing customers (i.e. those most loyal to the company), while other services connect in a more traditional peer-to-peer model. In addition, some crowdfunding programs operate on a debt model whereas others are focused on equity-based crowdfunding. One important thing to consider is the tax implications of crowdfunding, since both states and the IRS may apply complicated and expensive rules when treating crowdfunding income.
What is clear is that crowdfunding offers yet another avenue worthy of consideration, especially for small businesses that have a great story to tell and who can communicate effectively and passionately about their business vision and direction.
Finding the right financing solution for your business is no easy task, and today’s cautious lending environment can make it seem impossible to secure the money you need to grow your company to the next level.
Nonetheless, today CEOs have access to more options than ever before, and a creative approach that examines multiple avenues (or combines more than one together) can help you achieve your business goals in the timeframe you desire and with the right terms to help you build toward success.
Before applying for your next business loan, learn the seven essential steps you should take in this article: Essential Steps to Take When Applying for a Business Loan
Small Business Lending: Banks and Credit Unions Are Getting Left Behind
Alternative Online Lenders Fill Funding Needs For Small Businesses
SBA Launches Online Matchmaking for Small Business Loans
Introduction to Crowdfunding for Entrepreneurs
The pros and cons of crowdfunding
Crowdfunded Entrepreneurs, Tripped Up by the Taxman
Image Credit: rachelstrohm (Flickr @ Creative Commons)
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