MANYFunding

Start with money you already control

Bootstrapping means funding the business from savings and customer revenue. It is slower, but it costs no interest and gives away no ownership, and growing from sales tends to expose a weak idea early. Customer deposits, preorders and faster invoicing can all fund growth without a lender.

Money from friends and family is common at the earliest stage, and it is also where relationships get hurt. Put every arrangement in writing: whether it is a loan or an ownership stake, the amount, the repayment schedule or percentage owned, and what happens if the business fails. Ask a tax professional about minimum interest rules for family loans, and tell every relative to assume the money could be lost.

SBA-guaranteed loans

For most business loans, the U.S. Small Business Administration doesn’t lend directly. It guarantees part of loans made by approved lenders, which lets them approve borrowers they might otherwise decline, often with longer repayment terms. Expect thorough paperwork and the SBA’s general requirement that anyone owning 20 percent or more of the business personally guarantee the loan. Three programs cover most needs.

• 7(a) loans: the main program, used for working capital, equipment, real estate, refinancing and buying an existing business.
• 504 loans: long-term, fixed-rate financing for major fixed assets such as buildings and heavy equipment, made through a Certified Development Company alongside a bank.
• Microloans: loans of up to $50,000 from nonprofit intermediary lenders, often paired with business training.

Bank loans, credit lines and equipment financing

A term loan delivers a lump sum repaid on a fixed schedule, which suits a one-time purchase or expansion. A line of credit works as a reusable reserve: you draw what you need, pay interest only on the amount drawn and repay to free it up again, which suits seasonal gaps and uneven cash flow.

Banks usually want an operating history, steady revenue, good personal and business credit and often collateral. Equipment financing is often easier to qualify for because the equipment itself secures the loan. Terms tend to follow the machine’s useful life, and the lender can repossess it if you stop paying.

Financing against sales

Invoice factoring means selling unpaid customer invoices to a factoring company at a discount, and the factor often collects from your customer directly. Invoice financing instead uses the invoices as collateral for an advance while you keep collecting. Both turn slow-paying accounts into cash quickly, and the cost rises the longer invoices stay unpaid.

A merchant cash advance buys a share of your future sales for a fixed price, collected through daily or weekly withdrawals. Its cost is quoted as a factor rate rather than an interest rate: at a 1.35 factor rate, a $40,000 advance means repaying $54,000. Collected over a few months, that charge is far more expensive on an annual basis than most loans, so an advance belongs near the bottom of the list.

Business credit cards and grants

A business credit card is convenient for small, recurring purchases and short gaps, and rewards can offset some costs if you pay in full each month. Carried balances usually cost more than a bank loan or credit line, most cards require a personal guarantee, and business cards lack many of the protections federal law gives consumer cards.

Grants are rare and competitive for ordinary for-profit businesses. The SBA does not give grants to start or expand a business, and the grants that do exist usually target research and development, specific industries, places or groups, through federal agencies, states, cities and foundations. Anyone who contacts you out of the blue to say you qualify for a government grant and asks for a fee is running a scam.

Equity, angels and crowdfunding

Equity investors pay for a share of the company instead of repayment. Angel investors are individuals who back early companies with their own money. Venture capital firms invest pooled funds in companies that could grow very large, usually in exchange for board seats, investor protections and the expectation of an eventual sale or public offering, so most small businesses, including many profitable ones, are not a fit.

Crowdfunding comes in two very different forms. Rewards crowdfunding collects money from backers in exchange for a product or perk, with no ownership changing hands. Regulation Crowdfunding lets a company sell actual securities to the public through an SEC-registered funding portal or broker-dealer, with required disclosures, a filing with the SEC and a cap on how much it can raise in any 12-month period.

How to choose

Match the money to its purpose. Buildings and equipment suit long-term loans, short cash-flow gaps suit a credit line or invoice financing, and an unproven idea suits savings or equity rather than daily repayments. Then compare the finalists on five points.

• Cost: convert each offer to an annual percentage rate and a total dollar cost.
• Speed: the fastest money is usually the most expensive, so apply before you are desperate.
• Collateral: know which assets a lender can claim, and whether a lien covers everything the business owns.
• Personal guarantees: assume your savings, and possibly your home, are at stake if you sign one.
• Control: equity and some loans bring covenants, board seats or reporting duties.