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Understanding Types of Small Business Financing Options: Learn the Lingo

By Claire Parker, Staples® Contributing Writer

Getting a small business loan — whether it’s your first time or your fifth — can be intimidating, especially if your talents lie in a field other than finance.

But stress no longer. We talked with financial experts and business owners who’ve navigated the field to identify their best tips for talking the talk. These summaries highlight five financing options for getting the capital you need, and go beyond the bank options.

  • Small Business Administration Loans. If you’re applying for a Small Business Administration loan you’ll have to provide lots of documentation and a compelling business plan, says Kelly Crestani, director of lender services at South Jordan, UT–based Lendio, which recently launched a financing program through Staples to provide a wide array of loan options to small businesses. SBA loans can take up to 120 days to approve, are weighted on the experience of the owner, and require collateral and a credit score of 650 or higher. “The good news is the rates are going to be the most attractive,” he says. Loan amounts through Staples Business Loans can be as low as several thousand dollars up to a few million, and the term is going to generally be 20 years with a 10-year call and option to refinance.
  • Working Capital Loans. These loans finance the everyday operations of a business, and are designed as short-term solutions to help a business do things like pay bills, purchase inventory or make payroll. They are not intended for large equipment or capital purchases that would require a lengthy payback term. Cary Peterson, owner of Kohala Burger & Taco in Waimea, HI, worked with Staples’ new services provider, Lendio, to get this kind of loan after being rejected by his bank. “I am a restaurateur and chef by trade, so I know very little about finance,” he admits. “Lendio helped me select a loan for facility improvements and to work through the down time while the repairs are being made.” It’s worth noting, however, that working capital loans come with higher interest rates and have shorter repayment terms.
  • Merchant Cash Loans. Merchant cash advance companies use your cash or credit card deposits to lend generally one month’s worth of revenue (up to 125 percent). While these loans usually have high interest rates, they can solve immediate cash flow needs or help you grow your business with working capital. They’re also relatively easy to obtain and pay back; money is taken from your credit card sales. That’s why good candidates for this type of loan are businesses with high credit card sales, including retail merchants, restaurants and service businesses. As with any high-interest loan option, if you’re interested in a merchant cash advance loan, consult financial, legal and accounting professionals first.
  • Crowdfunding. This type of financing is largely done through Internet-based companies and allows startups to get, well, started or established businesses to fund new products. With crowdfunding, you can ask strangers to give you money with nothing in return (donation-based), you can offer a stake in your company in exchange for the Benjamins (equity-based), or you can offer some other benefit (discounts, advance access). Donation-based sites such as Indiegogo, Fundable or Kickstarter typically charge anywhere from 4 to 5 percent of the funds raised and can tack on transaction fees of up to 4 percent. With equity-based options, you’re giving up equity and possibly control, “but if the idea is a winner, you may have an endless stream of capital that will help you grow your dream,” Crestani says.
  • Venture Capital.Venture capital is money from groups of individuals with business acumen that want to help you build your business for the exchange of equity,” Crestani explains. Venture investors weigh the business plan itself and then look at the collateral in the event of a foreclosure. The interest rates can range from a single digit to what is called “hard money,” or double-digit rates. Venture investments make the most sense for technology or manufacturing enterprises, not retail or service businesses.

“Before you talk with a lender, you should be ready to fully describe your business, how much money you need and why you need it, and make sure to be upfront about any issues such as burning cash, bankruptcy or slow sale cycles,” says Cara O’Hare Carr, founder of The Capital Garden, a VC firm in San Jose, CA.

Words of Caution

Crestani suggests a few notes of caution before signing up for any binding agreements:

  1. Be cautious with short-term or high-interest loans. Cash is critical to a new business, but if the terms aren’t right, the loan may cost you more than it’s worth.
  2. Don’t give up more equity than you need. You don’t want to relinquish long-term control for short-term gains.
  3. Crawl. Walk. Run. Live within your means and have your company live within its cash flow.
  4. Don’t grow too fast. Start off with no more than you need. You can save the fancy conference room furnishings until you’re in the black.

Take the time to educate yourself on all the options available to small businesses, and then pinpoint the ones that best fit your needs and capabilities. Do your homework, and you’ll be able to talk the talk and walk the walk to a newer, and bigger, profit margin.

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