Are you a small business owner ready to grow? Perhaps you need to launch new marketing initiatives, hire additional staff, purchase equipment or simply shore up cash flow. But where do you start? Here are some funding alternatives along with the pros and cons of each.
What exactly is a credit card? NerdWallet breaks it down: “A credit card allows you to borrow money from your bank to make purchases, whether you’re buying a burger or a round-trip ticket to France. If you don’t pay it back in that time period, you’ll have to pay interest — a percentage of the money you owe the bank — on top of what you borrowed.”
- If you have decent credit, applying for and getting a business credit card can be relatively easy.
- Many cards have introductory specials like 0% APR for a specific time period.
- Credit card rewards are a big plus. Travel, cash back and bonuses can add up to savings and fun perks.
- Using a credit card responsibly will help build up your credit score, vital for getting affordable funds down the line.
- It’s very easy to pull out a credit card and make a purchase. Too easy! If you have trouble controlling expenses, you could find yourself with financial problems.
- If you don’t make a scheduled payment, your credit score can drop.
- Carrying too much credit card debt can make it harder to get another type of loan
- If you miss a payment, you’ll be responsible for a late fee.
P2P Personal Loans
Peer-to-peer lending – also known as person-to-person, P2P or social lending – anonymously matches up borrowers and lenders via an online platform using complex algorithms. Borrowers provide basic information and ask for a specific amount. Individual investors decide whether to fund the loan. P2P loans are like ordinary loans with interest rates and payback schedules.
- The online application process is generally fast and easy.
- P2P loans offer fixed interest rates and monthly payments with no hidden fees.
- As a P2P borrower, you’re anonymous to your lenders so there’s no direct contact.
- You aren’t required to provide collateral.
- P2P lending is not the most affordable way to fund a small business. APRs can range from 14% to 19% to even higher. Banks and SBA loans are considerably cheaper.
- If you have bad credit, you might be out of luck.
- Serious consequences apply if you don’t handle your P2P loans properly. Just because loans are unsecured, you’re still responsible for the total amount and interest. Missing a payment can impact your credit score.
Equity Investors are friends, family or others who want to invest in your business outright and become part owners instead of simply lending you money.
- Raising money through equity investors lets you avoid large loan payments, freeing up cash flow.
- If your business loses money or goes under, you probably won’t have to repay your investors their initial investment as long as you’ve disclosed the risks involved in your business
- Investors can have valuable business experience, offering advice, support and help.
- Equity investors usually end up taking a larger share of profits than a bank or other lender.
- Investors will be co-owners and have a legal right to information about all significant business events and decisions.
- Co-owners can sue if they believe you are compromising their rights. By offering equity, you’ll need to take investors’ interests into account when you make business decisions.
- Investors may be considered passive investors and their investment interests “securities.” That means, in some circumstances, lots of paperwork and legal requirements.
The Small Business Administration 7(a) Loan Program is the SBA’s primary program for helping small businesses with financing guaranteed for a variety of general business purposes. The SBA does not make loans itself, but rather guarantees loans made by participating lending institutions.
- SBA loans have very low interest rates compared to other types of loans.
- Funds can be used for a variety of purposes including marketing initiatives, equipment purchases, hiring, working capital and more.
- SBA loans help to build business credit
- SBA loans have no pre-payment penalty
- SBA loans have 10-year terms, leading to low monthly payments.
- There may be more documentation required for SBA loans than traditional bank loans because they are directly funded by lenders and backed by the U.S. government. However, if you’re working with SmartBiz to obtain an SBA loan, you’ll have a dedicated Relationship Manager who will help guide you through the application process.
- Good credit is required.
- Collateral may be necessary.
Merchant Cash Advance
In return for that lump sum advance, you agree to pay the lender back with a percentage of your daily credit card sales.
- Quick access to funds
- Easy approval process
- Bad credit is accepted
- Funds can be used for a wide range of business purposes
- Higher fees than with traditional loans.
- Less flexibility to change merchant service providers.
- Daily deduction of credit card receipts can drastically reduce cash flow.
The Bottom Line
Entrepreneurs should always strive to get the lowest price loan to fuel business growth. The “gold standard” to fund a small business is an SBA loan.
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