3 Entrepreneurial Funding Sources to Revisit: Loans, Lines of Credit, & SBA Guarantees

Ideas often come easily to the entrepreneur. Even with great ideas, securing funding for a new venture can be the toughest part of the entrepreneurial process. Depending on the type of venture, funding can be even more complicated. While many folks lean towards “bootstrapping” a.k.a. self-funding, some ideas take a bit more capital than an entrepreneur might have in their own bank account. Others pursue the help of angel investors or launch crowdfunding campaigns. These methods might be trendy options, but it’s not time, just yet, to dismiss some of the more traditional types of funding like good old fashion bank loans and lines of credit. These options are often referred to as debt options. Even these seemingly traditional debt options have experienced some revamps over the past decade. Let’s explore the highlights of each:

Loans:

While banks are the obvious place to start, you can get loans from multiple other sources like:

• Angel Investors- locally, specific to a business industry, and/or national groups.
• Family and Friend loans- just ask the people who believe in you the most, but PAY THEM BACK.
• Person-to-person (P2P) on sites like Lending Club (it’s like a combination between crowdfunding and a bank loan).
• Non-Financial Institution lenders for cash flow lending like Northwestern Mutual and Prudential
• Personal Guarantees with the Entrepreneurs personal property as collateral.
• Community Development Financial Institutions (CDFIs)- groups with specific affinity business groups in mind (examples: Farmers, Women-owned businesses, etc.) that might not be backed by traditional banks.
• Community Banks– smaller independent banks that understand community need and investment more than maybe a large national bank would.

 

Lines of Credit:

• Work much like opening a credit card, but through a lender. There is a maximum amount the entrepreneur can charge.
• Or, open a business credit card– it is a credit line.
• Unlike a lump sum loan, businesses use the money only as it is needed and only make payments on money spent.
• Lines of credit are particularly helpful if you have some cash flow slow downs because of a seasonal business or because you are just establishing the right payment schedule between you, your customers, and your suppliers.
• Some suppliers work out lines of credit with the businesses that buy from them, this is industry specific, but it’s worth asking for a line of credit from a supplier.

 

SBA Guarantees:

• Founded in 1953, the Small Business Administration has loaned funds to over 20 million businesses (Rogers 2014).
• Perks of their loans include longer pay back periods, most around 10 years and some up to 25 years.
• The SBA does not loan directly to businesses, rather they use approved banks and financial institutions.
• Only 1/3 of these loans go to new businesses each year in favor of established businesses.
• Non-profits, financial institutions, gambling, life insurance, and non-US citizen owned companies are all ineligible for SBA funds.
• The SBA offers a wide variety of loan products like Express loans, Micro Loans, and Real Estate & Equipment loans. Contact an SBA certified lender for a full list of options.
• In addition to funding, the SBA offers programs and classes through their development and learning center.
• SBA lenders can be found through sba.gov or 1-800-827-5722

 

Crowdfunding might be trendy, but remember, entrepreneurs can’t afford to just try one way. I hope this article has convinced you that loans, lines, of credit, and SBA funding has evolved and all three might be a viable option for your business depending on the needs of your entrepreneurial pursuit.

 

 

Resources:

Hecht, J. (2016) 5 Best and Fast Small-Business Loans (Some of Which You’ve Never Heard of). Retrieved from https://www.entrepreneur.com/slideshow/314882

Hecht, J. (2017) Lines of Credit: Online Lenders vs. Traditional Banks. Retrieved from https://www.entrepreneur.com/article/271273

Rogers, S. (2014). Entrepreneurial Finance: Third Edition, Finance and Business Strategies for the Serious Entrepreneur. 161-195.

Slotnick, D. (2018) The 8 best small business credit cards to open in 2018. Retrieved from https://www.businessinsider.com/best-small-business-credit-card

Loans Definition – Entrepreneur Small Business Encyclopedia https://www.entrepreneur.com/encyclopedia/loans

Additional links to businesses and financial institutions can be found throughout the article.

The Intersection of Crowdfunding and Traditional Debt Financing

“Anyone who lives within their means suffers from a lack of imagination.” – Oscar Wilde via Wisebread.com

Last week I wrote about crowdfunding and the many different platforms available for funding. I decided to explore the site Lending Club. I’ve since learned, this type of funding is called person-to-person or P2P lending. Think of it as crowdfunding meets an angel investing pool. I spent some time researching their model and writing some brief instructions on the steps to become approved with Lending Club. Here’s my screencast evaluation of their financing option:

And some more in-depth info on the steps for applying with Lending Club:

Now, let’s follow the (hypothetic) steps to apply from the borrower’s perspective:

Determine your eligibility

Click on this link for a dashboard of steps to follow (with access to the electronic platform):

https://help.lendingclub.com/hc/en-us/categories/202523217-Small-Business

1. Start by exploring the “How to Apply” button
2. Check your rate
3. Choose your offer, if given
4. Watch as people invest in your loan
5. Funding is sent directly to your bank account
6. Set-up monthly auto-draft payments
7. Pay off your loan early, if wanted, with no early pay-off penalty

 

Success and Key Questions (6/30/18 Stats):

https://www.lendingclub.com/info/statistics.action

• How much does the Crowdfunding source take as a fee? Varies depending on the terms of the loan
• How long will the process take until the money arrives and can be used? About 7 days for approval and a few more days for funds to be deposited (depending on bank rules). Need to use their check-list to avoid delays.
• Restrictions? Varies depending on the terms of the loan
• Reporting requirements? Lending Club wants to see your IRS tax return and requires a 4506-T form to do so. Borrowers would report funds as part of their tax return.