Small Business Funding Overview

Over the years, politicians have often stated that small businesses are the backbone of the economy. Despite their important role, it seems that obtaining the finances required to survive is getting harder. For those with a poor credit history and no history of success with the business, going to the bank normally isn’t an option. Fortunately, this is where alternative business funding comes in.

Challenges for Small Businesses

As a small business owner, the odds are often stacked against you. At the very beginning, you need a strong entrepreneurial spirit in order to recruit the right employees, complete a business plan, get the appropriate licenses, and deal with taxes. However, the task that has the potential to impact every other area of the business is financing. At times, it can seem as though everybody is doing all they can to prevent you from achieving your business goals. At South Florida Funding Group, we’re determined to help small businesses get the financial assistance they need to flourish.

Should you borrow from friends or family? Push for a bank loan? Look into alternative funding for small businesses? In this guide, we’re here to talk about your options. By the end, you should feel more confident about this decision and how it will affect your business both now and in the future.

Common Problems with Small Business Funding

Did you know that around half of all small business owners were able to start the business using savings and personal checking accounts? We know, this probably isn’t an option for you (hence why you’re reading this guide). With this, the next thought is probably automatically a bank loan. Although this seems like a sensible premise, the sad news is that around three in four applications are actually rejected.

From here, people turn towards investors by generating interest in the business idea and plan. If this fails, a shocking percentage give up and think their dream of running a small business is over. For existing companies, they continue to struggle and never get the chance to grow. Just because you’ve exhausted the options of which you’re aware, this doesn’t mean that other options don’t exist…and we’re glad you’ve made it to our page here today.

Two Considerations with Small Business Funding in Florida

Before we talk about the different types of financing, we first want to mention two considerations with small business funding that people often forget.

1. Too often, we see people thinking that financing is all about the business and the potential of the idea. In reality, your own credit history is also important for many funding methods. If you don’t want to get financing based on these personal details, it will normally come with a cash qualification requirement. Even with the best business idea in the world, you’re still a risk to a certain extent, and this is why you should research financing options as early as possible.

If you know you want to start a business in the future, start looking after your personal finances right now. Depending on your case, it could mean the difference between securing finance and getting nothing at all.

2. Secondly, people assume that getting financing for a franchise is much easier than for another small business idea. There is less risk for investors and lenders because the brand has a reputation and success is more likely, but franchises and startups are considered in the exact same way with many financing options.

Types of Small Business Funding

When we go through alternative funding for small businesses later, most solutions will fall into one of two categories: equity or debt financing.

Equity Financing - If you choose equity financing, you will obtain funds by selling a portion of the equity in the business. For example, you might ask an investor for $100,000 for a 10% equity stake in the business. You get the money; they get a portion of the business. Though we commonly think of venture capitalists and angel investors here, there’s no reason why an agreement of this type can’t be formed with a friend or family member.

One of the biggest benefits of this funding method is that investors often come with experience and expertise. On the other hand, one of the biggest drawbacks is that you’re losing a percentage of your business forever. This isn’t just a temporary agreement; the investor will stay with you until you offer to buy them out again (and this will cost more than the initial investment because their 10% will grow in value).

If you aren’t ready to lose a portion of your business, and a portion of the control, we recommend sticking to the second type of small business funding.

Debt Financing - With debt financing, this time we’re getting the money by borrowing it. After a lender gives the money, we’re responsible for paying it back over a set period of time (and normally with interest on top). The most common example is a bank loan, but we’re going to look at alternative lenders and sources of finance in this guide.

For the majority of small businesses, they find it easier to obtain debt financing; it’s simple, fast, and practical. For many investors, they will only offer equity financing for those who expect serious growth in the coming months and years. If the chance of early success is small, debt financing is normally the way to go.

Benefits of Small Business Alternative Funding

In the next section, we’re going to list the main funding options for small businesses. Before we do, we want to talk about alternative funding for small businesses. Since you’ll see a number of alternative funding solutions, what are the benefits of taking this route?

More Options - Earlier, we said that some startups try a business loan and investor before then giving up. With alternative funding, you have more solutions to turn your dream into reality.

Hands-Off Solutions - Rather than having to give up a percentage of the business, alternative funding tends to be hands-off; you will still have complete control of the business without disruption.

Poor Credit - For many small business owners, whether new or existing, they think they need strong credit to get the financial assistance they need. In truth, this isn’t the case. If you have poor credit, there may be other options available.

New and Existing Businesses - Whether you’re just starting your journey or have been in business for a while and now need access to finance, there are options for absolutely everybody.

Mentoring – With some methods, money can come with experience and mentoring. With the right investor, you could have a partner that helps push the business beyond anything you expected. Whether close mentoring or just a conversation every so often, it’s a great way to gain an experienced figure.

Fast Source of Money - If you need help right now, alternative business funding is probably the way to go. Rather than filling out hundreds of forms for a bank loan, you can get started almost immediately and start using the money as planned.

Freedom - Finally, most sources of small business funding in Florida will allow you to spend the money as you wish. There are no restrictions, no checking up on expenditure, just running the business naturally but with financial help.

Small Business Funding Option #1: Traditional Term Loan

Firstly, traditional term loans are generally used by those who need money for longer than two years. As a mature business owner who has been in business for some time, the monthly repayments are set, and you can put money towards working capital, refinancing debt, or even expansion.

Normally, you’ll have to state the purpose of the loan when applying. From here, you receive the money and are asked to repay over a fixed term (the interest rate should also remain fixed!). As a low-interest source of finance, the problem for some small business owners will be that strong credit is required.

With traditional term loans, you can pay the money back over one year or some will go as long as ten years. Of course, the longer terms will have more interest payments throughout the loan. As long as you bear this in mind, you can find a loan that works for you.

Small Business Funding Option #2: Business Term Loan

Essentially, this is the same as the first option, but we want to concentrate on the alternative funding side of term loans. Rather than applying to a bank for money, it will come from online lenders. In the same way, you’ll pay some back each month and it can last between two and five years. There are both benefits and drawbacks to this solution, and the first benefit is the quick application process. If you’re in desperate need of finance, the process is normally incredibly fast.

Once completed, you should have access to money quickly. Also, it’s an affordable solution in the world of alternative funding for small businesses. In terms of drawbacks, the biggest problem is that it can’t compete with SBA loans or bank loans for cost.

Small Business Funding Option #3: SBA Loans

For many years, the Small Business Administration (SBA) has been helping small businesses just like you with low-cost loans. At this point, we should dispel a common myth because this isn’t a loan from the SBA. Instead, it’s a normal loan from a lender but the SBA guarantees either a section of the loan or the whole thing. If you didn’t qualify for a bank loan before, you may do under this type of loan because the SBA has reduced the risk for the lender.

Despite the many benefits, there are still problems for those with poor credit. Over the years, SBA loans have come to be extremely desirable for both new and existing small businesses. With this in mind, the loans come with strict requirements, the application process is long, and you will need a respectable credit history to be considered.

If you do qualify, the difference between SBA loans and a traditional term loan is that you’ll get longer repayment terms as well as more beneficial interest rates. For example, towards the end of 2019, SBA loans had an interest rate of 7.5%. There are three different types of SBA loans:

• Microloans - Designed for loans under $50,000, this is ideal for those who need some extra financing to take the next step in the market. Since banks rarely offer loans of this type, the SBA has considered this and provided a solution.

• 7(a) Loan - As the most common program, small businesses can borrow up to $5 million whether they need it to buy real estate, start a new business, refinance debt, or purchase equipment.

• 504/CDC Loan - Lastly, this is used to buy real estate or other large assets. For example, we’ve seen businesses use it to renovate a building, buy large equipment, and improve their land.

Small Business Funding Option #4: Equipment Loans

If buying equipment is your main goal, know that there are financing options specifically for businesses to acquire it. Sometimes referred to as equipment financing, the idea is to get financing for new computers, machinery, or whatever other equipment you need. If you don’t have any other intention for the money, this is a good option because the lender is confident you won’t misspend.

How does it work? Well, known as asset-based financing, the equipment is the guarantee for the lender. In other words, the equipment will be taken away if you cannot make the payments. Since the equipment is the collateral, less emphasis is placed on your personal credit history. Even if you aren’t in the best financial position, lenders are more willing to accept the loan because they know the equipment is available to cover a lack of payments.

Equipment loans are formed in one of two ways:

• Leasing - With this first option, you’re essentially paying to rent the equipment. After paying each month over a specific period, you’ll then have the option to pay a fee to own the equipment for good.

• Loans - This is closer to what we’ve been talking about in that you own the equipment and are paying each month to pay off the loan.

Small Business Funding Option #5: Business Lines of Credit

For those with flexibility in mind, this could be the best option. With a business line of credit, you can manage the fluctuations that come with seasonal demand and unpredictability. Rather than getting a loan and then feeling obliged to spend the money, you draw on the source whenever you need it.

If you’re like most, you’re currently comparing this to a credit card, and there are definitely similarities. There’s capital in the account, and you only pay interest on the amount withdrawn. When you pay the money back, it’s available again for a future need. For this reason, you’ll see this type of alternative business funding called revolving or rotating credit lines.

If you don’t have a specific need for the money but want the peace of mind that comes with having capital available, we highly recommend a business line of credit. Over time, you can pay off debts, buy equipment and stock, use it as working capital, or just deal with seasonal fluctuations. When you have an emergency, business-induced or otherwise, there’s a source of finance to help.

Small Business Funding Option #6: Credit Cards

Business lines of credit are like credit cards, but what about credit cards themselves? In our experience, this is actually one of the most overlooked solutions of all. If you need lots of capital, a credit card isn’t for you because interest payments will make it unsustainable. If you don’t need too much, dipping into a credit card and then paying it back will give you much-needed assistance (while also building your credit score!).

In case you didn’t know, business credit cards are essentially the same as personal credit cards, but the money must go towards business expenses. Due to the nature of the account, spending limits are normally higher while also enjoying a welcome offer and lower interest rates.

For those with an average credit history, we understand you might be concerned about a credit card. However, some lenders provide cards to businesses attempting to rebuild credit. Over time, you build strong credit and will have access to more sources of finance.

Either way, some credit cards have an introductory 0% APR offer for one or two years. If you carry a balance into the next month, there’s no punishment. Be careful, though, because interest rates can reach 14% once this introductory period is over. Some big names for business credit cards include Chase, American Express, and Capital One.

Small Business Funding Option #7: Invoice Financing

In recent times, this option has grown in popularity within the niche of small business funding in Florida. As a small business, we’re sure you know the frustration that comes with clients who don’t pay their invoices. When this occurs, there’s a threat to the cash flow of the business. With this, some companies will have the opportunity to secure invoice financing. Here, you get a quick loan and the lender receives a percentage of your invoices. Essentially, the lender is paying future sales in advance.

Every week that passes, the company will charge a small percentage on invoice amounts. If you’re worried about paying expenses because of late payments from clients, this is an option. Rather than worrying about your credit, the lender will pay more attention to the repayment behaviors of clients. This funding option is sometimes called a ‘merchant cash advance’.

Small Business Funding Option #8: Secured and Unsecured Business Loans

Finally, the South Florida Funding Group can help you to secure either unsecured or secured business loans. While the former uses your credit history to get the loan, the latter secures it against an asset. If you don’t have assets, they can secure against an asset you buy with the loan. For some, they borrow money for an office building and then use this as collateral for the loan amount. If you fail to make payments, the lender can take possession of the collateral.

Other Funding Options

There we have it, alternative funding for small businesses. Here are some more funding options you might want to explore:

• Crowdfunding
• Grants
• P2P (peer-to-peer) lending
• Friends and family

Our Funding Advice

To finish, we want to provide some advice to people looking for finance. Whether you need help for an existing business or to launch a new one, this will hopefully help.

• Never Give Up - It might sound basic, but it should be the rule of life for absolutely everybody. Did you know that James Dyson created over 5,100 failed versions of the vacuum cleaner before the first model reached the shelves? Anything is possible if you keep pushing.

• Don’t Keep Taking on Debt - If you haven’t planned business funding, don’t just keep adding big purchases to a credit card. Don’t sink the business before it has a chance to swim.

• Plan - How much money do you have personally and as a business? Often, it takes this simple question to really understand one’s financial position. How do you plan to finance the business both now and in the future? How will you buy machinery and pay for recruitment? Plan all expenses and not just those in the immediate future.

• Protect Your Credit - In life, there are few things more important than our credit scores. If yours is struggling, it’s time to do something about it. Since this simple number tells lenders the risk of lending to you, action is required now to help both you and the business.

• Get Help - At South Florida Funding Group, we have experience in helping businesses just like yours. We can help you to secure the alternative business funding that suits your needs. Reach out for an initial consultation today! 786-544-2700