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The 8 Best Ways to Get Small Business Financing

For many small businesses, access to finance can be a matter of life and death.

The stakes are particularly high, with 18.4 percent of U.S. businesses failing within the first year, 49.7 percent after five years and 65.5 percent after 10 years, according to LendingTree’s analysis of data from the U.S. Bureau of Labor Statistics. One of the main reasons businesses suffer is lack of funding, so it’s especially important to know where to turn if you need a bailout.

While options may vary depending on factors such as size, industry, quantity required, time frame, and purpose, here are eight options to consider:

1. Family and friends

This can be a unique position because it generally doesn’t come with many financial background requirements or other prerequisites. “Uncle Charlie will be willing to believe in you without asking for extensive financial documentation,” said Joshua Oberndorf, managing director of EisnerAmper’s private business services group.

The good sides: Easier access to needed funds without high interest rates.

Cons: Failing to return funds on time or refusing them altogether can sour family relationships. “Money is as much accounting as it is psychological,” Oberndorf said.

What more to know: According to the IRS, relatives must charge a minimum interest rate to avoid adverse gift tax consequences. The IRS publishes the following Applicable Federal Rates (AFRs) each month.

2. Banks

The good sides: A reliable and well-established source of funding. It can be lower cost than other options and offers the ability to grow your lending and banking relationship over time.

Cons: Banks can have rigid loan requirements, including a good personal credit score and ample cash flow and income, that may be out of reach for some credit borrowers, and the process can be slow, sometimes taking several weeks to secure a loan.

What more to know: According to LendingTree, fees can range from 3% to 7%. Consider a smaller bank that may be willing to extend credit and walk you through some of your options, said Matt Barbieri, a certified public accountant at Wiss & Co., which provides business advisory services.

3. Online lenders or financiers

The good sides: It provides quick access to capital, generally through a simple online process.

Cons: It can be difficult to discern the true cost of capital, especially with a merchant cash advance, which is when a business uses a percentage of debit and credit card sales, plus a fee, to repay the business. It is a prepaid sum with a debit service. Some online lenders and financiers may not have long track records, and the option may be more expensive than others. An online loan, for example, has an APR of between 7% and 99%, while the approximate APR for a merchant cash advance is between 40% and 350%, according to NerdWallet.

What more to know: Do your due diligence with the online lender or financier you choose to use, said Craig Palubia, president of Optim Consulting Group. Make sure the company has a good reputation and multiple good reviews, and be sure to compare multiple options. It is also important to delve into the total cost of capital, taking into account the interest rate, if applicable, fees and early payment penalties, if any.

To help you understand the true cost of a merchant cash advance, use an online calculator.

4. SBA loans

The good sides: Federal protection provides access to low-rate bank financing for small and large loans. There are different types of loans and lenders and programs have unique eligibility requirements. Resource centers are available to support business owners, including those in underserved communities.

Cons: The approval process can be slow. The term depends on the loan, but generally it can take a few months. A down payment or guarantee may be required. Applicants with poor credit will not be accepted.

What more to know: There are different types of SBA loans, and the maximums vary. The most common type of SBA loan is called a 7(a), and you can expect to pay between 7% and 9.5%. “Be prepared to work on a refinancing as soon as the deal allows,” Barbieri said. This will allow the removal of personal guarantees and restrictive covenants that can stifle growth, he said. An SBA loan may offer a longer repayment period – up to 10 years for equipment and working capital under the 7(a) program; 25 years for real estate – and can offer competitive interest rates compared to conventional bank loans.

5. Credit cards

The good sides: Quick access to capital with the opportunity to receive rewards. It can be a good option for short-term financing needs if you are confident that you can pay off the debt before interest starts accruing. Business cards tend to have higher credit limits than personal cards.

Cons: Interest rates can be high. Cards that are well-rated by Creditcards.com offer APRs from 10% to nearly 35%, and some cards charge an annual fee. Generally not a good choice for large financial needs.

What more to know: “Don’t rely on this as the only source of funding growth; if you’re too high risk for other categories, consider that before taking on consumer credit as a business,” Barbieri said.

6. Equity of investors

Private grants, private equity and people with money to invest can serve as sources of funding.

The good sides: Positive cash flow as well as the experience to help drive the business forward.

Cons: Capital dilution, it’s hard to find the right match.

What more to know: Palubiak advises owners to tap into their network and affiliate with startup communities and local organizations to make investor connections.

“Give yourself as much time as you can before choosing a partner,” Barbieri said. “Make sure their goals align with your goals or it will end badly.”

7. Federal, state and economic development assistance

The good sides: Usually non-dilutive, it can be small or large.

Cons: There may be administrative issues and restrictive eligibility requirements.

What more to know: It could be a good option if you’re a company that can be considered “important” to your region’s infrastructure, Barbieri said. Begin your research by researching the resources on the US Economic Development Administration website to find EDA regional office contacts, state government contacts, and other information.

8. Crowdfunding

The good sides: It gives you access to capital without accumulating debt, and allows you to raise money and increase your brand awareness among potential investors and customers while testing an idea.

Cons: It may have a low success rate. There may be fees associated with certain platforms. Also, launching a successful campaign requires marketing resources and time.

What more to know: There are more and more equity crowdfunding websites available. Before choosing a provider, make sure you understand how the platform works, the fees, who can invest, and how it can meet your specific funding needs.

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Disclosure: NBCUniversal and Comcast Ventures are investors acorns.

The 8 Best Ways to Get Small Business Financing

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