Getting financing as a small business can be hard. Read to learn about the five best financing options for small businesses.
As a small business owner, there may come a time when you find yourself in search of financing. Maybe you need money to expand your office space. Maybe you need money to acquire a competitor. Or maybe you need money for new equipment.
Regardless of why you’re seeking financing, it’s good to know there are many options to consider. To put you on the right track, we’re sharing five of the best financing options for small businesses.
The U.S. Small Business Administration (SBA) offers several loan programs, each of which is designed for a specific purpose. For example, there is a program for purchasing major fixed assets, such as real estate or equipment.
Here are a few steps you can take to improve your chance of qualifying for an SBA loan:
- Improve your business and personal credit scores.
- Make a list of SBA approved lenders and their minimum requirements.
- Gather all the required legal and financial documents.
- Create a business plan.
- Provide collateral.
Go back in time 10 years and the phrase “alternative lending” was nowhere to be found. Today, however, it’s all the rage. As the name suggests, this is an alternative to loan programs offered through traditional banks. Alternative lenders are non-bank entities that provide small business financing. While traditional banks have strict requirements and low approval rates, alternative lenders are on the opposite side of the spectrum.
The benefits of financing through an alternative lender include:
- Greater chance of approval.
- More flexibility.
- Less paperwork and documentation.
- Faster funding.
Much the same as a traditional bank loan, alternative lenders require a variety of information from prospective borrowers. Even so, the requirements are less strict, which improves your chance of securing financing.
Crowdfunding gives small business owners the opportunity to raise capital through the collective effort of a large group of individuals, as opposed to a single entity. With a variety of crowdfunding platforms to consider, a growing number of entrepreneurs have turned their attention to this method of financing. While anybody can start a campaign in search of funding, there’s no guarantee of success. Once you choose your platform, it’s time to do the following:
- Set a realistic funding target.
- Create a detailed pitch.
- Market your campaign.
With crowdfunding, you don’t have to concern yourself with loan applications, collateral, and other details that may hold you back. Instead, your primary concern is creating a unique pitch that will attract investors.
A favorite funding method of many entrepreneurs, an angel investor is a person who provides money to a business in exchange for equity (or convertible debt). While these individuals exist, they can be difficult to find. Furthermore, angel investors review many proposals but only invest in a select few opportunities. If you want to get funding from an angel, it’s imperative to create a sound business plan, perfect your pitch, know what you want in terms of financing, and know what you’re willing to give up in return.
Depending on your age and financial approach, you may have enough money in a retirement account to fund your business startup. In this case, you will want to consider a Rollover for Business Startups, also known as a ROBS.
This allows you to invest your retirement funds without paying an early withdrawal penalty or income tax. You can use the funds to:
- Start a new business or franchise.
- Buy an existing business or franchise.
- Recapitalize an existing business or franchise.
A ROBS is not a loan, which means you aren’t taking on debt or required to pay back interest. Here are the five steps for getting started:
- Form a C Corporation.
- Create a 401(k) retirement plan for the corporation.
- Transfer the funds from your personal retirement account into the new 401(k) plan.
- The plan uses the funds to purchase stock in the corporation.
- The proceeds from the sale of stock are used to start, buy, or recapitalize a business.
There are three basic eligibility requirements:
- You must have a qualifying requirement account, such as: 401(k), 403(b), SEP, TSP, Keogh, or traditional IRA.
- Have a minimum of $50k in retirement funds. This isn’t required, but without it the fees aren’t worth paying.
- Your account can’t be held with your current employer. If you’re keeping your job, your employer isn’t likely to allow you to roll over funds into a ROBS.
These five financing options for small businesses are among the most common. Once you understand the eligibility requirements of each method, along with the pros and cons, you can decide which path to follow.
This article was originally published on February 16, 2017.