Marc Prosser
Getting an injection of cash flow for your business can open up the possibilities for growth. But capital comes at a price; no matter which of the following options you choose, know the costs, and factor that into your decision on which is best for your small business.
Family and Friends
Before you consider this as an option for your business financing, ask yourself whether your personal relationship could survive such a business-oriented transaction. Borrowing money from loved ones can put a strain on your relationship, and this cost alone may make it not worth the venture.
If you do decide to go this route, set up a clear repayment plan, including how long you will take to pay it back, the interest rate you will pay, and how much your monthly payment will be.
Not sure how to calculate the interest rate? If your family member or friend is taking money out of a savings or investment account, offer to at least match the interest rate she will be losing by loaning you the money. If you’re lucky, she’ll offer an interest-free loan, making it the most affordable financing option!
SBA Loan
The Small Business Association wants businesses like yours to succeed, and so they have a financing program designed to help you secure funding at a reasonable cost. There are some stipulations to qualify for an SBA loan, such as you needing to have been in business at least two years, having a personal credit score of at least 680, and be seeking $30,000 or more in financing.
Currently, the interest rates for an SBA loan are between 3.93% and 8.25%, depending on the type of loan you qualify for. So if you borrowed $30,000 with an SBA loan at a 5.25% interest rate, you would end up paying just over $35,000 with interest.
Venture Capital
Another option for financing is to take on venture capital investors. This isn’t a loan; instead, you are bringing on equity partners. So, in exchange for a fixed investment, you give up a percent of your company. How big a percent depends on the valuation of your firm.
While it might seem ideal to get financing you don’t have to pay back until you’ve “made it” and the investor can cash out on their investment, giving up partial control of your company is something you’ll want to think twice about before doing. For some, having the industry experience and contacts of a venture capitalist is a boon. For others, it feels like infringement on their business.
Micro Lender
If you don’t qualify for a traditional SBA loan, micro loans might be an option for you. They’re designed to help entrepreneurs get on their feet, but they come at a high price. Micro loans have high interest rates, to the tune of 5-18%. That’s much higher than traditional loans, but if this is all you qualify for, it may be worth it.
Before you take this option, do the math. On a $30,000 loan over 7 years, you could pay more than $20,000 in interest!
Merchant Cash Advance
If you accept credit cards in your small business, a merchant cash advance could be an option to consider for financing. Essentially a loan against future credit card sales, a cash advance will take a small percentage of your daily credit card transactions until the balance is paid off.
The cost of a merchant cash advance can be quite steep, especially if you take longer to pay it off. Your interest rate is assigned based on the factor rate assigned to you (this determines how risky an investment you are). The quicker you pay off the loan, the less interest you’ll pay over time. But spread it out over a year or longer, and you could end up paying triple digits in interest!
Alternative Lenders
Another option for capital that is gaining in popularity these days comes from what are called alternative lenders. Also known as short-term loans, these provide quick access to funds to businesses who might not qualify for other financing. They’re more affordable than merchant cash advances, and payment terms can go up to three years, though you’ll pay less for the privilege of the loan if you pay it off in a year or less.
Rates can be as low as 3-4%, with more of the APR being charged in the initial months, and then just 1% in subsequent months. A $30,000 loan, if paid off in 6 months, would total $33,000 with interest, while paying it off in 12 months would total $37,200.
Getting capital for your business can help you expand operations, or simply keep you afloat when cash isn’t flowing. Just carefully weigh the long-term costs of any financing option you consider.
