Funding Options to Start and Grow Your Small Business

Access to Capital 101:
Funding Options to Start and
Grow Your Small Business
May 28, 2015
Rhea Aguinaldo
Manager of Entrepreneurship
Small Business Majority
About Small Business Majority
• Small business education and advocacy organization –
founded and run by small business owners. Been in
business nine years.
• National – 14 offices in Washington, D.C., California,
Colorado, Illinois, Maryland, Michigan, Missouri, New Jersey,
New York, Ohio, Oregon, Virginia and Washington state
• Focus on issues of top importance to small businesses
(<100 employees) and the self-employed, including access
to capital, workforce, healthcare, retirement, taxes,
technology and energy savings.
• Work supported by extensive research
Entrepreneurship Program
Our Entrepreneurship Program brings resources and education
to small business owners and entrepreneurs in key areas of
running and growing a small business.
• Core program areas: Access to capital, technology, workforce
benefits, business skills, retirement security.
• Online and in-person seminars in partnership with local and nat’l
business groups and other for-profit, nonprofit and public entities
• Special focus on underserved entrepreneurs, women- and
minority-owned businesses
Visit our Entrepreneurship resource portal:
Topics of discussion
• Background and research
• Key questions to ask when seeking funding
• Debt vs. equity financing
• The funding landscape:
o Microloans
o SBA-backed loans
o Community banks & credit unions
o Alternative online lenders: Merchant cash advance,
marketplace lenders, cash flow lenders, crowdfunding
• Resources and tools
• Q&A
The dilemma
• Inadequate access to capital continues to be a top issue
facing small business
Our scientific opinion polling: 90% of small businesses say the
availability of credit is a problem
Women and minority owned
businesses
• Women and minority owned firms face significant
barriers:
o Typically smaller in size, start with less capital, less likely
to have access to venture capital
o Lower approval rates for bank loans and at smaller dollar
amounts
o More vulnerable to predatory lending
Women and minority owned
businesses (cont.)
• Women-owned firms account for 16% of bank loans
and 4.4% of dollar total – just $1 out of every $23
• Minority firms pay higher interest rates on average
o Low levels of wealth and liquidity constraints
What happened to small
business bank lending?
• Small business bank lending is down 20% since before
the Great Recession
• Banks are more risk averse – stricter underwriting
standards
• Small business loans are riskier than large business
loans; Costly to write smaller $ loans
• Consolidation of community
banks
Small business recovery
• Small businesses were hit hard by the Great Recession
o Many suffer from devalued collateral, damaged credit
scores and reduced cash flow making them less
credit worthy by today’s lending standards
40%
Small businesses accounted
for 40% of job losses after the
financial crisis
Access to capital – the lifeblood
of small business
• The availability of capital is crucial for small business
startup, survival, and growth
Small business uses of capital
Renovation and remodeling
Expansion and acquisition
Purchase equipment
Purchase real estate
Purchase inventory
Short and long term working capital
Hire employees
Manage cash flow
• Access to capital for small business means job creation
in local communities and economic stability.
The good news
• There are more funding options
available than ever before
to help you start
and grow your business
Important questions to consider
• What do you need the money for?
• How much money do you need?
• How long will it take you to pay it
back?
• What is the current financial shape
of your business?
• How long have you been in
business?
• How much collateral, if any, do
you have to put up for the loan?
• How quickly do you need the money?
Debt vs. Equity financing
• Debt financing is money you pay back, usually with
interest, over a set time period with specific terms
o Examples: Bank loans, Credit cards
• Equity financing involves giving up a portion of the
ownership of business in exchange for money from
equity investors; equity investors become part owner of
company.
o Examples: Angel investors, Venture capitalists
Debt vs. equity financing (cont.)
Debt financing
+ Pros
•
Wide range of options
•
Easier to obtain than equity financing
•
Retain control and ownership of
business
•
Interest paid is tax-deductible
– Cons
Equity financing
+ Pros
•
Intellectual capital – Investors can
provide expertise, experience and key
contacts
•
No obligation to repay if business
loses money or fails
•
Flexible use of funds without burden
of paying down debt
– Cons
•
Collateral, personal guarantee often
required
•
Forfeit sole ownership and control of
business and profits
•
Repayment required regardless of
how business is doing
•
Time consuming; Difficult to find
•
Funds spent paying down debt
•
Actions must reflect interests of
investors
Sources of funding
Family & friends
Personal savings
Microloans
Personal & Business
credit cards
Home equity
Community banks &
Credit unions
Venture capital
Equipment financing
Merchant cash advance
Angel investors
Receivables & Purchase
order financing
Online cash flow lenders
Economic dev’t
agencies
Bank loans
Online marketplace
lenders
Start up programs,
bus. plan
competitions
SBA loans (guarantee)
Crowdfunding:
Reward & Equity
Grants
Community dev’t loan
funds (CDFI)
Incubators & accelerators
SBA-backed loans (guarantee)
The U.S. Small Business Administration (SBA) guarantees a
portion of loans to provide incentive for institutions to approve
loans to small businesses who are riskier borrowers and not
poised to obtain traditional bank loans.
• SBA is not a lender, but a guarantor
• Loans cover a wide range of uses incl. start-ups, working
capital, inventory, real estate, equip, etc.
• Programs also available for disaster relief, export assistance
and veteran and military
SBA-backed loans (guarantee)
Primary SBA loan programs
• 7(a) loans allows funds to be used for starting, acquiring or
expanding a small business; up to $5M
o Up to 7 years for working capital; Rates from prime +1 to
prime +4; Fees 2% to 3.75%
• Certified Dev’t Company/504 loans are long-term, fixed rate
financing for real estate equipment and other fixed assets
o Terms for 10 or 20 years
• Borrowers must apply through a participating lender
institution
SBA-backed loans (guarantee)
+ Pros
• Very competitive rates
• Longer loan terms
• No balloon payments
Tools
– Cons
• Lengthy application
process requiring
extensive documentation
• Strict underwriting
requirements
• Personal guarantee
required
• Find an SBA lender near you for in-person consultation with
a loan specialist: www.sba.gov
• SBA resource partners : Women’s Business Centers, SCORE,
Small Business Development Centers
Microloans
Microloans are small loans (less than $50k) for entrepreneurs
who are typically ineligible for traditional bank loans; may be
used for wide range of business purposes.
• Community Development Financial Institutions (CDFIs) are
dedicated to responsible affordable lending to disadvantaged
entrepreneurs and low-income communities
o Revolving loan funds through private and gov’t funding
o High touch model includes mentoring and technical
assistance support
o Examples: Accion and Opportunity Fund
Microloans (cont.)
+ Pros
– Cons
• Competitive rates
• Small value loans may
not be sufficient
• Personal collateral and
guaranteed often
required
• Great for entrepreneurs
unable to secure
traditional bank loans
• Microlenders offer add’l
business technical
assistance support
Resources:
• Opportunity Finance Network is a national membership
organization of CDFIs across the country. Find a CDFI near
you: www.ofn.org
Community banks and
credit unions
Small community banks and credit unions have long been key
allies for small business
• Community banks: small, locally owned and operated
o Primary focus on supporting small business
• Credit unions: not-for-profit financial institutions
o Clients must become members
o Not all offer small business loans
Small business loan approval rates in 2014
Big banks
20%
Community banks
50%
Credit unions
43%
Community banks and
Credit unions (cont.)
+ Pros
• Low interest rates (6% to
10%) – current avg. 7%
• Long loan terms (multiyear)
• Commitment to local
community
• Great customer service,
personal touch
– Cons
• Long application times
• High hurdles, i.e. in business
for 2+ years, good credit,
collateral requirements
• Tightly regulated – limited
flexibility
• Less range of products and
technology than big banks
Resources
•
National Credit Union Association locator:
www.ncua.gov
•
Independent Community Bankers of America locator:
www.icba.org
Alternative online lenders
• A new breed of online lenders are
innovating small business lending,
expanding new options for entrepreneurs:
o Simple, streamlined application process
o Convenient and quick approval and delivery
of funds
o Typically higher interest rates than banks
• Not all online marketplace lenders are equal and some
players mask very high rates
Small businesses must proceed with caution
Merchant cash advance
A merchant cash advance (MCA) provides cash up-front in
exchange for a portion of future credit card or cash sales. The
provider in turn takes a percentage of credit card/debit sales
every day until the loan, plus a premium, is paid back.
• Not technically lenders but credit card payment
processors
• Quick and unsecured funds at a high price
• Payday loans for small businesses
Merchant cash advance
+ Pros
•
Fast access to cash
•
Easy approval process
•
•
•
No collateral, bad credit
OK
Payments tied to fixed
percentage of sales
Good for retailers,
restaurants and service
based cash/creditintensive businesses
– Cons
• Very expensive: interest
rates are high
• Short-term: Not
sustainable for funding
long term growth
• Daily payments reduce
cash flow
• No due date, no fixed
payment
• Borrowers can get locked
into cycle of high risk loans
Merchant cash advance
Tip
• MCAs should be a last resort
• Be cautious of deceptive and aggressive sales/advertising
o Keywords: Fast cash, no credit score, no collateral needed
• Proper cash flow planning is highly recommended
• Fundastic merchant cash advance APR calculator:
www.fundastic.com
• Examples: CAN Capital, RapidAdvance, AdvanceMe,
AmeriMerchant, Merchant Cash & Capital
Online marketplace lenders
• Online marketplace lenders (peer-to-peer) connect small
businesses with institutional and individual investors; capital
obtained via term loan, similar to traditional bank loan.
o New wave of online lenders
o Focused on transparency in pricing and overall process
Online marketplace lenders
There are 2 main types of marketplace loans:
• Personal loans for business use (unsecured, no collateral
req’d) – Don’t look into your business; focus on personal
finances and credit score
o Lending Club, Prosper
• Business loans (secured, collateral req’d) – Similar to small
business bank loan; look into business and personal
finances
o Funding Circle, Dealstruck, Lending Club
Online marketplace lenders
+ Pros
• Fixed monthly
payments
• Transparent pricing and
process
• Quick application,
approval and delivery
of funds
– Cons
• Higher interest rates
than banks
• Lenders may require
access to bank account
Online cash flow lenders
• Loans typically secured for short-term working capital (cash
flow)
• Non-traditional underwriting algorithms incl. social, online
data
o Short-term (6-12 mo.)
o High-interest (20-50%)
o Similar to merchant cash advance
o Deduct a fixed amount or percent of sales on daily basis
until loan is paid off
• Examples: OnDeck, Kabbage, IOU Central, PayPal, Square,
Amazon
Online cash flow lenders
+ Pros
• Instant decision, fast
access to cash
• Flexible underwriting as
long as you have cash
flow
• No collateral required
(personal guarantee in
most cases)
– Cons
• Very high interest rates
• Opaque pricing makes
true cost of loans hard
to determine, often
50%+
• Not term loan
• Borrowers can get
locked into cycle of
high risk loans
• Lender pulls directly
from merchant or bank
accts
Crowdfunding
• In crowdfunding, entrepreneurs raise funds by reaching out
to a large number of people (investors) through an online
platform.
o Lots of smaller sums of money takes the place of one or
two large investors
• Entrepreneurs create an online campaign about their
venture/idea, indicate amount of money they’re seeking, what
it’ll be used for, and what contributors (or investors) will get in
return.
o The best campaigns inspire people to donate or invest.
Crowdfunding – Reward & Equity
There are 2 main types of crowdfunding:
• Reward crowdfunding
o Most common form, popularized by sites like IndieGogo and
Kickstarter
o Entrepreneurs solicit financial contributions in exchange for
rewards (T-shirt, customized trinket, thank-you note, first access
to product)
o No financial return so SEC laws don’t apply
• Equity crowdfunding
o Similar concept but instead entrepreneur offers financial return
o JOBS Act and Title II rules
Crowdfunding (cont.)
+ Pros
– Cons
• Opens new pools of
funding
• Time intensive before,
during and after campaign
• Eliminates the
gatekeepers–no financial
underwriting
• Requires tech savvy
• Marketing and promotion
• IP protection
• Vet an idea
• A successful campaign can
lead to bank or VC funds
• Some platforms have all or
nothing policy
• Not for all businesses and
industries
Resources:
• Online review site to compare and choose which crowdfunding
platform is right for your business: Crowdsunite.com
Crowdfunding (cont.)
Are you a good crowdfunding candidate?
Ask yourself three questions:
• Do you have a loyal following or inspiring story?
• Do you have a good email list and social media presence?
• Are you looking to engage an audience of potential
customers?
The funding landscape
Fundastic was created with small business owners in mind and provides unbiased, objective
information, resources and tools to help small business owners navigate their financing options,
with a special focus on the new online lending options.
Resources
Still need help navigating your options?
•
Visit lender agnostic
marketplaces to comparison
shop among a wide range of
products from a variety of
lenders–community banks,
online lenders, SBA loans, etc.
•
Bonus: they also provide good
educational tools and resources
Resources
Small Business Majority
www.smallbusinessmajority.org
Visit our Entrepreneurship resource portal
www.sbmbizportal.com
Opportunity Fund
http://www.opportunityfund.org
Join our network
Contact
Rhea Aguinaldo
Manager of Entrepreneurship
[email protected]
Ways to Get Involved:
(415) 654-4846
Connect with us!
@SmlBizMajority
Small Business Majority
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Questions?
Small Business Majority
www.smallbusinessmajority.org
Rhea Aguinaldo
Manager of Entrepreneurship
[email protected]
(415) 654-4846