The Top 7 Funding Sources for Small Businesses in 2020Written by InvoiceBerry Team on March 30, 2020
At some point, most businesses need to access capital outside of their regular revenue streams. Funding sources like SBA loans, equipment loans, and other small business loan options can help companies grow to capture larger market shares or tap into niche markets. Business credit cards give companies access to quick funding that they can use to pay for anything from travel expenses to retail goods. And are a good source of borrowed capital for newer businesses that don’t have a long track record in business.
Before you choose a funding source for your small business, make sure you compare your options. You may discover that some sources meet your needs better than others.
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Crowdfunding sites like Indiegogo and Kickstarter give businesses opportunities to access money without the cost of interest. Instead of paying a bank or other lender, the crowd will often contribute to your business or idea for a premium that might include something like an advance version of your products and services. For example, a company that wants to develop a new video game may give funders early access to the game or add perks like t-shirts and stickers.
Statistica reports that crowdfunding helps North American companies raise $17.2 billion per year. In 2019, people started about 6.45 billion crowdfunding campaigns.
Business owners often like crowdfunding because it comes with little to no risk. Crowdfunding is kind of an all or nothing proposition. In other words, if you don’t reach your funding goal, any money short of your goal will be returned to your contributors, but you will otherwise only be out the time and energy you put into your pitch to the crowd. You might not get to build the product you want or open a new location, but you don’t actually lose anything.
When you borrow money you have to accept the obligation of the periodic payment regardless of whether or not your business idea is a success.. Every type of loan charges interest, which means you could end up repaying more than you borrowed even though you never got to explore a new opportunity.
Online lenders can meet the needs of established small businesses with a record of repaying debts on time. They often work as an alternative to small business loans from banks.
Since the Great Recession of 2007, small businesses have struggled finding access to capital to fuel growth and fund other business initiatives. Traditional lenders, like banks and credit unions, often require specific collateral to secure a loan, a large down payment,rigid qualification criteria and require numerous financial documents (balance sheets, personal bank statements, business bank statements, personal tax returns, and on and on) as part of the loan application process.
The situation with traditional banks changed a little during 2019 when business loan approval percentages reached 27.3%. That means over 70% of businesses were denied loans from banks.
Online lenders will likely charge higher interest rates than banks do. Many online lenders look at the loan qualification process differently than their more-traditional counterparts. Loan terms might be shorter and sometimes interest rates could be higher, but they are also approving loan applications to borrowers who might not qualify at a traditional lender. Some online lenders will even qualify a borrower qualify for a loan even if the business owner has a less-than-perfect personal credit score and the business has a weak credit profile. The application process is also streamlined.
None of this means that online lenders will approve a loan to just any business that applies. You still have to qualify. And the better your credit history, the more options will be available to you.
Still, the flexibility of online lenders can make it easier for small businesses to access the funds they need to grow.
If you start comparing online lenders, you’ll probably run into websites that offer peer-to-peer (P2P) loans. With a peer-to-peer loan, an individual, hedge fund, or lending company is who offers your business a loan. Like every other lender, they expect to earn money by charging interest.
The P2P loans that you find online usually include support from an underwriter. The underwriter acts as an intermediary between you and the institution that provides the money.
It’s a convenient way for you to access funds and investors to generate profits.
Benefits of peer-to-peer loans include:
- Fast approval processes.
- Fixed interest rates.
- Well-defined terms that show you exactly how and when you will repay the loan.
- No collateral requirements.
The interest rates for peer-to-peer loans can vary wildly. If your business has a terrific credit score, you could get a rate as low as 6%. A poor score, though, could mean that lenders ask for interest rates as high as 36%.
There are a couple of disadvantages to consider before taking a peer-to-peer loan. You’ll probably have to pay an origination or closing fee between 0.5 and 6 percent. It’s a one-time payment, but it could add significantly to your overall loan cost and.
Peer-to-peer lenders also tend to set limits that might not meet your funding needs. If you want $20,000 to develop a prototype, then a peer-to-peer loan makes sense. If you need $100,000 or more, you’re almost certainly out of luck.
Business Credit Cards
You might think that business owners would avoid credit cards because the perception is that credit cards have notoriously high-interest rates. That’s not always the case, though.
According to Nav’s Small Business American Dream Gap Report, 22% of business owners say that they count business credit cards as a top funding source. What’s more, a business credit card is a good option for young businesses that don’t have a well-established business credit profile because the qualification criteria is not as rigid as a small business loan.
A closer look at business credit cards helps show why so many entrepreneurs choose them. Some benefits of choosing credit cards include:
- A potential 0% introductory interest rate
- Immediate access to money without the paperwork needed to get a loan
- Easy ways to track and report spending
- Fraud protection
- Cashback, travel, and other perks depending on the business credit card
If you have good credit, you could also qualify for a business credit card with a lower APR. While some credit card companies will charge 25% or higher, there are plenty of options that will go as low 13.74%. Many will also waive their annual fees for reliable users.
Make sure you compare several business credit card offers. Just because one company charges a ridiculous rate doesn’t mean that you won’t find a much better deal someone else. You should also make sure the business credit card reports to the appropriate business credit bureau or it won’t help you build a strong business credit profile.
With vendor credit, your supplier gives allows you to take payment terms, rather than pay cash (usually 10, 30, 60, or 90 days). Although vendor credit might not be a small business loan, it can be a powerful tool for building business credit—particularly for young businesses that might not qualify for a business loan or line of credit. It also allows you to leverage borrowed capital to meet your inventory needs and free up cash flow for other business purposes.
There are also disadvantages to using vendor credit. If your vendor reports your credit history to the business credit bureaus, failing to pay your vendor on time can damage your business’s credit rating, making it more difficult for you to access low-interest lines in the future. Nevertheless, vendors that report your good credit history to the appropriate business credit bureaus will help you build a strong credit profile.
Buying equipment can help your business explore or expand revenue opportunities. For example, a successful delivery service could use an equipment loan to add vehicles to its fleet. Similarly, a restaurant could use an equipment loan to purchase a commercial oven that lets them bake fresh, in-house pastries.
The interest rates vary significantly with equipment loans. If your business has an excellent credit score, you could qualify for an equipment loan with an interest rate as low as 8%. With less-than-ideal credit, you will pay closer to 25%.
You can get lower interest rates with equipment loans because the equipment acts as collateral. If you don’t make timely payments, the lender could repossess the equipment you need to operate your business.
Equipment loans are very flexible because they let you decide whether you:
- Lease the equipment.
- Buy the equipment your business needs.
- Use a sale-and-leaseback option.
Each opportunity has pros and cons. When you use a loan to buy equipment, you usually need a large down payment. Over time, though, you will spend less money on interest.
When you lease, you avoid the high down payment, but you spread your payments out over a longer period. That means you’ll end up spending more money on interest, which increases the overall amount that you pay for your equipment.
With sale-and-leaseback, you sell equipment to your lender and lease it from them. The sale gives you fast access to cash that can help you grow your business. Leasing, however, can cost you significantly more than buying. At the end of the lease term, though, you usually get the option to buy the equipment from your lender.
Small business owners often think that the U.S. Small Business Administration (SBA) will loan them money. That’s not how it works, though. Instead, the SBA works with lending partners to help you get low-interest loans. The SBA guarantees repayment, so lenders are willing to give businesses lower interest rates and other benefits.
The SBA has at least a dozen loan programs, so it’s difficult to describe all of the pros and cons. The situation depends on which loan you qualify for. A (7a) Small Business Loan, for example, lets you borrow up to $350,000 with interest as low as 7%. The SBA will guarantee 75% to 85% of your loan, depending on how much you borrow. The SBA qualification criteria is not quite as stringent as a normal bank term loan, but will require more than the typical online business loan. The SBA also has restrictions on how you use the money.
SBA loans fit the needs of many businesses. Make sure you explore your options to choose a loan that fits you well, though.
Now that you know more about small business funding sources, you can choose an option that helps your business meet its needs without spending more money than necessary.
Regardless of which source you choose, repay your debts on time to improve your credit score.
Kali has a decade of experience guiding individuals through the confusing world of credit and finance. Her work has appeared on Business Insider, MSN Money, USA Today, and many other top tier publications. She currently serves as the Editorial and Marketing Director for Nav.