There must be a bunch of small business funding infomercials running on TV, hulu or streaming somewhere lately because I keep getting people asking me about grants and free money they’ve heard about. This happens periodically and I once wrote a column about how to deal with these offers. I reviewed a July 2002 column and discovered it’s still timely. Not much has changed in 13 years when it comes to financing for small business, except the growth of on line funding. So here it is again (with some modifications and updates)…

It seems that if you watch late night television, you’ll see multiple programs touting “MONEY FOR SMALL BUSINESS- GRANTS, FREE MONEY, LOW INTEREST LOANS- COME GET IT.” All you have to do is wish, or at most make a phone call, and the green will start flowing and flowing ….

Sound too good to be true? Well-it is! Not to throw cold water on the party however- there is a plethora of finance vehicles out there for your business: Grants, conventional loans, government loans, long term loans, short term loans, fixed asset loans, working capital loans, lines of credit, lease financing, accounts receivable financing, factoring, micro loans, venture capital, angel capital, sweat equity, personal resources, on line portals such as crowd funding…..lots of alternatives for financing your small business… oh my- what to choose?

Well- the first step is to understand the different finance vehicles- because the next step is to match your need to the financing alternative.  There’s no point in asking the soprano to sing like a tenor- and there’s no point in trying to use short term financing for a long term need.

Following are brief definitions of the types of financing listed above, and some comments about their practical uses:
Grants:  Ho! Ho! Ho! Not to be cynical but if you think you can start a for-profit small business and someone will just hand you enough money to operate, you’re into what some call “creative thinking.”  A grant is a gift- it does not have to be returned. There is a small grant program which provides up to $700 to a very low income entrepreneur (Trickle up Program). On the other end of the spectrum, if you have invented a technology which can be used in homeland defense, or a cure for world hunger, there are government grants (SBIR Grants). And, there is now the NYS Regional Economic Development Council unified grant program to support projects with lots of leverage and which have major community impact. The typical LI entrepreneur is not going to receive a grant to start and operate her or his business. On the other hand, don’t ignore offers of free technical assistance and other such support, which are the equivalent of a grant since you don’t have to pay for them- things like exporting assistance from NYS, subsidy of a consultant to help you plan family business ownership transition, free counseling from retired business people who are members of the Service Corps. Of Retired Executives, free business plan assistance from the Small Business Development Centers, free help to obtain government contracts from Procurement Technical Assistance Centers, free energy audits of your building from local utilities. There’s a long list of free assistance programs to help your small business.

Loans: Unlike a grant, a loan has to be repaid to the lender. Generally, your business must be able to demonstrate that it can repay that loan, either based on historical activity of the business or projections of future activity. There are numerous loan products out there- available from a variety of sources: conventional, nonbank, government.
Conventional loans are from banks- savings or commercial banks. Nonbank loans are from institutions other than banks- credit unions, insurance companies, major corporations with a finance arm, leasing companies, equipment vendors, etc. Government loans are those which come directly from a government entity or are guaranteed by the government entity or have some other government support or are made through an intermediary. Many government related loans need to accomplish something in addition to loan repayment & “profit.” They are seeking to help the community, accomplish economic development goals, create or retain jobs, help redevelop blighted communities, etc. So, when applying for a government loan, you need to be aware that simple ability to repay the loan is not enough. You need to fit within the prescribed goals of the government program. Government loans tend to be longer term and can have a lower rate or more favorable rules.

There are numerous types of loan products available from these different sources. Long term loans are loans which have a long repayment period. The longer you have to pay back your loan, the less you will have to repay each month-and the easier it is on your cash flow. Any term over one year can be considered long term. The term of the loan will typically match the life of the asset being financed. So, money for commercial real estate acquisition may be lent for 20-25 years. Short term means a loan of one year or less. Be aware that lenders like to match loan terms to the needs of the borrower.

Fixed asset loans are loans to buy capital assets- assets which have a long term useful life and long term life under IRS depreciation standards. Working Capital loans are for just about any business purpose other than fixed or capital assets- money to pay your staff, phone bills, buy inventory, etc. Lines of credit allow you to borrow as you need money (rather than taking a lump sum and having to pay back principal and interest on the entire sum even though you didn’t need it all). You pay interest only on the amount drawn down from the line. Revolving lines usually require you to “clean them up” by paying back the principal at the end of the year, at which time you can draw down that amount again. Lease financing can come from the equipment vendor or another entity. Its an extension of credit where you pay for the equipment (including interest) and either turn it back at the end of the lease or purchase it for an agreed upon sum. In Accounts Receivable financing a lender is loaning you money against your receivables (with them as security) (usually a percentage) at an agreed upon rate of return. Under Factoring the factor is buying the receivables for an agreed upon sum and the factor’s return (the “effective interest” you’re paying) is the difference between the amount collected on the receivable and the amount paid by the factor. Factoring can be expensive but has its place in the financing scene. Cash Merchant financing has become popular. Basically, the merchant lender advances a certain amount of funding based on credit card receipts and withdraws payback directly from credit card sales.  Micro loans is a term of art, generally meaning a loan (almost any type) under $25,000. Government related micro loan programs often come with technical assistance and are available to the more marginal companies. Venture Capital is sometimes touted as the panacea for start up entrepreneurs. In this tight credit market, few start ups will receive venture capital. Venture capital can be debt (loans) or equity (a piece of the business) or some combination thereof. Venture money comes with a high price (the VC’s expect a significant rate of return for the major risk) but also comes with expertise and guidance. Venture funds tend to specialize in a particular industry. The US Small Business Administration has a venture fund program called SBIC. Angel capital is in the form of loans or equity (in exchange for ownership) from high net worth individuals. There are angel capital networks throughout the US. The “Shark Tank” types of ventures which have popped up around the country provide equity financing in exchange for pieces of the company.

 Sweat equity and personal resources are the most common financing sources for small business. The time you put into the business, creating it, operating it, is your sweat equity. Personal resources range from your savings, proceeds of a mortgage on your home, to loans and gifts from friends and family.

Crowd funding/on line portal funding has become a means of financing for some entrepreneurs. Its viability and nature varies substantially. With some on line sites, people are actually providing “contributed” dollars to your business in exchange for something (a free product or service).  This is typically called “crowd funding”, a process of funding your business or business project through monetary contributions from a large group of people over the internet. Funding platforms bring your business/project together with the funders.

So, there it is- the major alternatives for financing your business. Back to the basic question- what to choose?… Once you have determined what kind of financing is most suitable for your business need, the appropriate type will become clear. That’s not the end of the story … you must qualify for the financing, be it loan or otherwise…. How to qualify? That’s for another article….. In the meantime… keep dreaming of that “MONEY, MONEY, MONEY”… for your small business.