Cash Sources for Small Business: Which is Right for You?

Small businesses need cash, especially right now. I speak to many small business owners who are praying for investors to move their business to the next level.

I get it, SCALE seems sexy, but very few businesses are actually prepared to do so, especially as it relates to funding. 

Despite what has been popularized by Shark Tank, asking for O.P.M (other people’s money) isn’t the only way to get cash to grow. There are other ways that don’t require giving up ownership of your company. Let’s take a look at the types of funding that are available and the pros and cons of using them.  

Peppered into the descriptions are references to articles by Geri Stengel, president of Ventureneer, which provides clients with branded research, training and content opportunities that generate thought-leadership, visibility, sales, and brand loyalty. 

She specializes in defining and eliminating problems that hold underrepresented entrepreneurs back, especially minorities and women. Her company contributes to the annual American Express State of the Women Owned Business report.

Sources of Cash

Funding Option #1: Grants

Pro: It’s the least expensive form of cash besides cash from sales. 

Con: Highly competitive; often specific eligibility requirements; requires an investment of time to find opportunities and complete applications

Here is a short list of 14 grant opportunities for women. 

Funding Option #2: Credit Cards and Cash Advances

Pro: Quick access to short term credit with little to no documentation; payment deferred for 30-60 days;  amount of credit extended can be sizable given good/excellent credit standing; introductory interest rate can be as low as 0%. The reward and points programs give long time customers benefits and perks (e.g. cash, discounts, bill reduction, giftcards).

Con: Relatively high interest rates contingent on your credit profile; additional fees (e.g. annual fees, foreign transaction fees, balance transfer fees) depending on the card; late payment has significant impact on your credit score.

Funding Option #3: Traditional Business Loans

Pro: Flexibility in size, terms and collateral used to back the loan.

Con: Difficult to gain approval with less than good credit standing and a solid business history; requires a personal guarantee.

Before applying for a traditional loan, understand the 6C’s that lenders use to consider when reviewing your loan application. 

Funding Option #4: Bank Lines of Credit

Pro: Provides flexibility in use and payment; draw funds as needed and pay down when possible; reasonable interest rates considering your credit profile

Con: A document intensive application process; requires you share tax returns, financial statements and other persona and business financial records; a 3-6 month approval process; requires depositing money into a bank.

Funding Option #5: Non-traditional Lines of Credit and Term Loans (e.g. Kabbage and OnDeck)

Pro: convenient and simple application process;  quick approval process; short and medium term loans; funding up to $250K or $500K; no credit score minimum;  less stringent requirements than traditional funding sources.

Con: higher interest rates and fees than traditional loans.

Funding Option #6: Merchant Cash Advances (e.g. Shopify Capital, Square Capital, Paypal Capital)

Provide funds in exchange for a percentage of the businesses’ daily credit card or debit card sales.

Pro: quick access to short term funding; quick application and approval process; no credit score requirements; interest rates tend to be inexpensive.

Con: daily deduction of credit card or debit card sales as repayment; only available to users of the merchant platform.

Funding Option #7: Accounts Receivable Factoring

A business sells its accounts receivable (invoices) to a third party (called a factor) at a discount to get cash quickly. It’s not a debt or equity. Application acceptance depends on your customer’s credit worthiness.  Learn the basics of invoice factoring here.

Pro: flexible funding based on sales not your net worth; quick access to cash with little restrictions and personal guarantees; useful for those that don’t qualify for traditional financing.

Con: more expensive than a traditional bank loan; never receive 100% of the unpaid invoices.

Funding Option #8: Traditional Crowdfunding (KIVA, Indiegogo, Kickstarter)

Pro: interest free funding; successful campaigns could catapult your company; keep all of your cash; accessible to businesses that have trouble raising money; allows people you know and those that believe in your mission to support.

Con: high fees; requires a lot of time and effort to build campaigns and gain support.

Funding Option #9: Investment Crowdfunding

Allows businesses to raise money via online platforms; there are three types (Regulation CF, Regulation D, Regulation A+) enacted by the JOBS Act of 2012. Refer to this article for more.

Pro: provides growth oriented businesses access to millions in investments from main street and wealthy accredited investors; allows customers to turn into investors and allows investors to access high yielding private lending.

Con: competitive application process; specific and sometimes intense application and qualification process.

Learn more about investment crowdfunding from the women of Worthy Financial and EnrichHER who are making these funding options more accessible to women and minority owned businesses.

Funding Option #10: Family and Friends

Pro: initial adopters and supporters that are invested in your success;  they may lend without expecting interest or a return.

Con:  expect to create an agreement with them in good faith to represent your commitment to paying them back.

Funding Option #11: Equity Investors

Pro: they typically have access to a large network and other resources that can help advance your business exponentially.

Con: they take a percentage ownership in your business and in some cases require voting rights and a position among your executive team; it takes time and effort to find the right investors.

Look Before Leaping

Before jumping into any vehicle to access cash, consider which option will best help you advance the business forward whether you’re using the cash to hire more people, buy more inventory or grow exponentially. Be aware of the implications of accepting funding (e.g. effects on credit score, the business’s reputation or ownership).  

Have an outsourced CFO perform scenario analysis to assist you in figuring out exactly how much cash you need, the best funding option and how it will affect the business’s financial health. 

Tricia M. Taitt

Tricia M. Taitt

As founder and principal of The Art of Money Matters, an outsourced CFO firm, Tricia has spent the last 10 years helping small and mid-sized businesses improve their profitability, cash flow and operations in preparation for major growth or a sale.

Share this: