How to Choose the Right Financing Option for Your Small Business
Geri Stengel, WE NYC Mentor
Geri Stengel - Ventureneer

If you want to start or grow your company, you may need outside financing.

Because every situation is different, there is no one-size-fits-all financing option. Even if you have no collateral, a poor (or no) credit score or no steady cash flow, there are still financing options for you. The key is to educate yourself.

In addition to the factors just mentioned, your options will vary by:

  • the stage of your company — are you a startup or have you been around for awhile?
  • the size of the market that you’re targeting — is it a billion-dollars-plus industry or is it much smaller? 
  • the potential your offering has — does the product address a must-have need in a big or a small market?
  • how fast you want to grow — do you want to scale your business really quickly or grow gradually?
  • how much money you need in order to scale and when will you reach profitability;
  • the impressiveness of your team.

Although borrowing money typically means that you’re paying interest, there are two interest-free options that you might want to consider.

  • Kiva is a great choice if you want to raise $10,000 or less. You raise small amounts of money from people you know. The rest comes from the Kiva community of lenders. You pay back the money over a two-year period of time. Kiva is particularly good for young companies that may have trouble raising money by other means. Read more about Kiva.
  • Companies looking to raise money to manufacture a new product like a gadget or food are turning to rewards-based crowdfunding on sites like Indiegogo and Kickstarter. The benefits of rewards-based crowdfunding are so compelling that even Fortune 500 companies such as GE are turning to the crowd when introducing new products. This is the one type of financing in which women outperform men and is appropriate for startups as well as mature companies.

Even if you have no collateral, a poor (or no) credit score or no steady cash flow, there are still financing options for you.

Geri Stengel

You have numerous choices for financing sources that charge interest. Here are some, listed in order from those offering the lowest interest rates to the highest.

  • Traditional banks will be the cheapest, but their criteria will be the highest. Banks want it all — good credit scores, cash flow, collateral and character of the borrower. This option is best if you’ve been in business two-plus years.
  • Community banks and credit unions are also a good choice. Because they’re more likely to know you personally, your character can sometimes compensate for lower credit scores, cash flow inconsistencies and lower to no collateral levels.
  • Community Development Funding Institutions (CDFIs) lend money to small businesses, such as women- and minority-owned firms, that commercial banks deem risky. CDFIs support their borrowers with training and technical assistance to ensure their success, making these alternative lenders a long-established social investment option. Accion and Grameen are two CDFIs that lend in New York City. Through the Tory Burch Foundation and Upper Manhattan Business Loan Program, small business owners may qualify for reduced-interest-rate loans. Read more about Accion and Grameen.
  • Alternative lenders are typically a more expensive choice, but when you don’t have the best credit score, have uneven cash flow or even a black mark on your personal credit and/or are a young company, this may be the best route for you. These options include factoring, merchant cash advance and equipment leasing. Companies of all sizes and stages of their business use these options.
  • Online marketplace lenders include traditional debt options as well as alternative lenders. They offer speed and convenience.

Equity financing is a method of financing in which a company issues shares of stock and receives money in return. Investors may earn a dividend, though they are far more likely to realize value from their investment when the company is acquired by another or goes public. Equity investments can come from friends and family, angel investors (offline or through crowdfunding platforms), venture capitalists (VCs) or private equity firms. You can also seek equity financing from the public in the form of a mini IPO, as detailed under Title IV of the JOBS Act, Regulation A+, or following a traditional initial public offering (IPO).

Money from friends and family is usually used to fund the very earliest stages of a company, sometimes before you even have a prototype. Angels will most likely want you to have a prototype. VCs tend to come after you’ve built the prototype and proven that the market wants your product.

For more information, on financing read A Woman’s Resource for Starting and Financing a Business.

At the stage of your company is now, what funding options look like a fit for you?