Financing Sources that Fit Your Business
Most of the sources for financing small business mentioned in this lesson signed The Small Business Borrowers’ Bill of Rights. We endorse the Bill of Rights because it underscores shared values of fundamental fairness and transparency. Visit the site to find out which lenders are signatories.
In addition, we curate a list of financing sources that we think may be a good fit for human scale businesses. (Please note that we do not accept referral fees from anybody.) For your convenience, download a PDF that contains a list of many of the financing resources mentioned in this lesson.
Focus on Friends and Family and Alternative Lenders
Only 1% or so of early-stage businesses receive equity financing from angel investors and venture capitalists. Banks increasingly seek relatively large, mature borrowers. Consequently, most small businesses should probably focus on friends and family and non-bank, alternative lenders during the early years.
Managing Friends and Family Loans
There are many advantages of getting financing from friends and family (and their friends). However, balancing personal and business relationships is tricky. Be businesslike and provide your friends and family with clear agreements and processes. Don’t underestimate the administration required to service multi-party investments. Believe me, it can feel like death from a thousand cuts! Use technology to make such relationships efficient and transparent. Your life will be better, and your backers will appreciate it.
Don’t Overlook Non-profit Lenders
Non-profit organizations are the predominate lenders for business loans of less than $50,000. Many of these microlenders are geographically oriented. Examples include Montana & Idaho Community Development Corporation (MCDC) and Opportunity Fund in California. There is probably at least one such organization near you. Talk to your local Small Business Development Center (SBDC) to find out what’s offered in your community.
Recently, online marketplaces for microloans have emerged. Kiva facilitates 0% interest term loans up to $10,000 to U.S. business borrowers. In many cases, a Kiva loan is a great alternative to rewards-based crowdfunding, for instance.
Online Lenders and Marketplaces
Online lenders and marketplaces have boomed in the last decade. These include the likes of Funding Circle, Fundera, and P2Binvestor:
- Funding Circle offers term loans of up to $500,000 at somewhat higher annual percentage rates (APRs).
- Fundera is an online marketplace that matches borrowers with providers of a wide range of business loan products including lines of credit, term loans, and merchant cash advances.
- P2Binvestor specializes in providing lines of credit backed by accounts receivable and inventory to rapidly growing, business-to-business (B2B) companies that need $1 million or more.
P2Bi is a “hybrid” platform. In other words, they lend their own money as well as match borrowers with individual and institutional lenders. Hybrid platforms have “skin in the game.”
Funding Circle and Fundera are marketplace platforms. That is, they facilitate loans but don’t lend their own money. In a sense, they are loan brokers.
There’s a lot of innovation going on in the unregulated “fintech” world these days. It’s exciting. However, it’s a little like the Wild West. Plan ahead; know what you are looking for; and proceed with caution.
Banks Still Rule the Market
Notwithstanding the new fintech kids on the block, banks still dominate the market for business loans. If you can meet their stringent underwriting standards, banks can offer the lowest cost debt. Sometimes, the Small Business Administration (SBA) will offer loan guarantees that can accelerate access to bank debt. However, before you invest a lot of time and effort pursuing an SBA-backed bank loan, do your homework.SBA Loan Programs
As a rule of thumb, local and regional banks are most interested in loans of at least $100,000. Large regional banks are really looking for loans of at least $500,000. Local conditions matter, so get a local guide. Again, a visit to your local Small Business Development Center can be a productive way to get the lay of the land.Representative Financing Sources