Capital Access – Capital Landscape

Banks and Credit Unions

Conventional financial institutions such as banks and credit unions typically cater to both individual and business clients, offering a comprehensive range of banking services. These include personal and business credit options, equipment financing, working capital, lines of credit, standard and government-backed loans, merchant services, as well as checking and savings accounts.

Credit Cards

Consumer and business credit cards are forms of unsecured debt, meaning they are not backed by collateral, with interest rates ranging from 0% (typically a short-term introductory offer) to 28% (usually a penalty rate). The average interest rate tends to hover around 15%. Credit card applications are assessed based on factors like credit scores, payment history, income, and outstanding balances.

Equipment Financing

Equipment financing refers to loan programs tailored for purchasing equipment, where the equipment itself serves as collateral for the loan. Interest rates are influenced by factors such as the type and condition of the equipment, the length of time in business, the owner’s credit profile, and the financial health of the business. Financing equipment through debt not only adds new liabilities but also increases the asset value on the business’s balance sheet.

Friends and Family Loans

Loans from friends and family are among the most common sources of debt capital, whether for startup or expansion funding. It’s important to treat this type of capital with the same care and professionalism as any other loan. To avoid misunderstandings, consider drafting a promissory note that outlines the terms of the loan clearly between both parties. This document should specify the loan term, interest rate, repayment amount, and payment schedule. Templates for promissory notes can be found online or obtained from your attorney.

Government Direct Loan Programs

Numerous loan and financing programs are available through city, county, state, and federal agencies. Some are designed to support specific types of projects, while others offer more general funding options.

Government Loan Guarantee Programs

State and federally funded programs offer a variety of loan guarantee options, providing lenders with guarantees covering 75% to 90% of the loan amount, similar to insurance. These guarantees help mitigate lender risk, enabling them to approve loans that might otherwise be declined. However, the decision to use a loan guarantee rests with the lender. Loan guarantees often come with additional costs, such as higher interest rates, fees, extended requirements, and longer processing times.

Home Equity Lines of Credit (HELOC)

Home Equity Lines of Credit (HELOCs) allow homeowners to access the equity accumulated in their residential property. By using home equity as collateral, individuals with sufficient personal income may qualify for a second mortgage, providing working capital for purposes such as home improvements or personal expenses. HELOCs typically offer low interest rates compared to other loan options.

International Trade Finance Tools

A variety of international trade financing options are available, including export working capital, term loans, and export credit insurance.

Leasing

Leasing is a viable option for acquiring new or used vehicles and other capital equipment. Leasing services are often available through specialized leasing companies, banks, credit unions, and even some equipment manufacturers or distributors. Rates are influenced by factors such as the type and condition of the equipment, business tenure, owner credit history, and overall financial performance. Leasing allows business owners to deduct lease payments as expenses and, depending on the lease type, the equipment typically isn’t recorded as a business asset until it is purchased at the end of the lease term.

Lines of Credit

Lines of credit from banks and credit unions are commonly used to address short-term working capital needs, such as covering payroll, purchasing materials, managing payables, and maintaining inventory while awaiting payment on receivables. Having sufficient working capital is often essential for sustaining and growing a business.

Vendor Terms

Vendor terms allow businesses to leverage supplier generosity by deferring payment for goods or services within an agreed-upon timeframe. Standard terms typically range from 15 to 30 days, while extended terms can stretch to 45, 90, or even 120 days. This approach exemplifies using ‘other people’s money’ to facilitate business operations and growth.

Angel Investors and Private Equity

Angel investors, angel conferences, and private equity firms are valuable sources of equity funding, offering capital for startups or business growth. These investors typically aim for a 5-10x return on their investment within 5-7 years, with investments generally ranging from $50,000 to $5 million. Angels and private equity firms prioritize businesses that can scale rapidly in size and market share while having a clear strategy for a future exit. In contrast, longer-term strategic investors, often called ‘Slow Money’ investors, focus on portfolio investments with a longer horizon for returns. Equity contributions can come in the form of cash or business assets, representing an ownership stake in the company.

Business Partners

Business partners can serve as a valuable source of equity funding, providing capital for startups or business expansion. Contributions may come in the form of cash or business assets, representing an ownership stake in the company.

Friends and Family Investments

Friends and family who contribute cash or business assets to help start or expand a business become investors and partial owners of the company.

Owner Equity (Savings)

Owner equity refers to the cash founders contribute to the business, whether at the startup stage, during growth, or to support operations during periods of low cash flow. Initial contributions typically establish the company’s opening shares and, in the case of multiple owners or partners, determine each partner’s ownership percentage. Owner equity is often a requirement for securing loans, with minimum contributions usually ranging from 10-20%.

Venture Capital

Angel investors, angel conferences, and private equity firms are additional sources of equity funding, while venture capital (VC) comes from professional firms specializing in specific growth sectors where they have expertise. VC funding typically enters during the later stages of a company’s growth, with investments ranging from $1 million to hundreds of millions of dollars.

Asset Based Lenders

Asset-based lenders (ABL) offer entrepreneurs access to non-bank lines of credit or term loans by using business assets as collateral, often to address cash flow or working capital needs. Common business assets used include fixed assets like real estate and equipment, as well as current assets such as inventory and receivables.

Certificate of Deposit

Creative entrepreneurs often use Certificates of Deposit (CDs) pledged by friends or family as collateral to bridge gaps when their personal and business assets don’t meet a bank’s collateral requirements for a loan.

Community Development Finance Institutions and Non-Traditional Lenders

Certified Community Development Financial Institutions (CDFIs) and non-traditional lenders play a crucial role in bridging the gap left by traditional lenders. These lenders offer solutions for entrepreneurs who may not qualify for conventional bank or credit union debt programs due to factors like low credit scores, insufficient collateral, lack of industry experience, or tight cash flow. Non-traditional lenders and CDFIs are often mission-driven and provide a range of small business financing options, including micro-loans (under $50K), equipment loans, term loans, permanent working capital, and sometimes even credit lines. As these lenders address the needs that traditional institutions cannot, their interest rates tend to be higher due to the increased risk involved. The higher rates serve as an incentive for business owners to eventually transition to traditional lenders with more favorable terms.

Crowdfunded Debt

The rise of crowdfunding and peer-to-peer lending platforms, such as KivaZip.com, CommunitySourcedCapital.com, and LendingTree.com, has made it easier for businesses to access crowdfunded debt with interest rates ranging from 0% to 15%. These unsecured small business loans are typically assessed based on factors like the applicant’s credit score, years in business, and intended use of the funds. In many cases, a borrower’s success in obtaining funding depends on their ability to promote their crowdfunding campaign effectively to friends, family, and followers within their network.”

Factoring

When lines of credit are unavailable, factoring can be a viable short-term cashflow management solution. For small businesses with qualified receivables, factoring companies can provide advances of 80-90% of the invoiced amount in exchange for a percentage of the payment. In return for this advance, business owners typically incur finance fees ranging from 3-7% of the total receivables, along with transaction and account setup fees.”

Merchant Cash Advances

Merchant Cash Advances (MCA) provide upfront term loans for working capital, repaid at high interest rates through a merchant services account. Repayment is typically structured as a percentage of future debit/credit sales or through regular daily/weekly Automated Clearing House (ACH) withdrawals. These frequent ACH withdrawals can place significant strain on small business cashflow.”

Online Unsecured Lenders

Several online non-traditional lenders offer small business term loans and working capital lines of credit. These lenders typically require online applications, conduct credit checks, and provide rapid credit decisions. Most of these loans are unsecured, meaning no collateral is required. However, due to the higher credit risk associated with unsecured loans, interest rates are generally higher than those of traditional credit programs.

Prepaid Sales

Prepaid sales, also known as unearned revenues, can serve as a debt-based crowdfunding strategy. Through this approach, crowdfunders prepay for goods or services with the expectation of future delivery (fulfillment). This method enables small businesses to raise funds for startup or expansion projects while creating a secondary sales channel. Various online platforms cater to different industries to simplify this strategy. Examples include: (1) CrowdSupply.com for manufacturers pre-selling goods, (2) Credibles.co for pre-selling food-related items, and (3) Kickstarter.com and Indiegogo.com for pre-selling a wide variety of goods and services. As a form of debt, prepaid sales are recorded as a short-term liability on the balance sheet until the revenue is earned or recognized.

Seller Carry

Also known as “Owner Carry” or a “Seller Carry Contract”—is a financing arrangement where the owner or seller of an asset (such as equipment, real estate, or a business) provides direct financing to the buyer through a loan with interest. This method is particularly common in scenarios like business sales, especially when a buyer, such as an employee, needs help assembling sufficient capital to meet the seller’s asking price. As with loans from friends and family, the IRS requires the application of minimum interest rates, known as Applicable Federal Rates (AFRs).

Crowdfunded Equity

The evolution of the global crowdfunding space has introduced equity-based crowdfunding platforms for entrepreneurs. Many platforms, like Fundable.com, are tailored to attract accredited investors. However, the implementation of Title IV of the JOBS Act in June 2015 expanded equity crowdfunding opportunities to include non-accredited investors, significantly broadening the reach for entrepreneurs seeking equity funding across all 50 states.

Grants

Grants are external cash contributions provided by public, private, and nonprofit organizations, often designated for specific economic purposes. These funds typically come with strict requirements such as extensive applications, deadlines, matching fund commitments, and detailed reporting. Hundreds of grant programs exist, each designed to support different industries, needs, and stages of business development.

One notable grant program for small businesses is the Individual Development Account (IDA). IDAs are matching savings accounts where participating business owners save towards a goal, and the granting organization matches those savings, sometimes at a ratio of two or three to one.

Licensing

Although not technically equity, licensing involves granting the use of intellectual property (IP), information, processes, or activities in exchange for a one-time upfront fee. This arrangement provides a creative way for businesses with valuable IP assets to generate new funding streams. By licensing their IP, companies can monetize their assets without relinquishing ownership, opening opportunities for growth and expansion.

Retirement Funds

When traditional capital sources are depleted, entrepreneurs may consider using retirement funds to meet startup, expansion, or working capital needs. One specialized option is ROBS (Rollovers as Business Start-Ups), which enables 401(k) account holders to roll over their retirement investments without incurring tax penalties. Through this process, funds are used to purchase founder stock in a startup C-Corporation, providing a legal and tax-advantaged way to inject capital into a business.

Reward-Based Crowdfunding

Reward-based crowdfunding is one of the most popular forms of crowdfunding. In this model, contributors provide monetary support, often through platforms like Kickstarter.com, in exchange for promised rewards. These rewards can be either tangible, such as a product or merchandise, or intangible, such as recognition or exclusive experiences. Typically, the value of the reward is less than the amount of the contribution, making this a cost-effective way for businesses to raise funds while engaging with their supporters.

Royalties

Royalties, while not technically equity, are a form of licensing fees paid to asset owners based on usage, often calculated as a percentage of sales revenue. This funding model is particularly well-suited for companies with intellectual property (IP) assets or rights. By licensing or assigning these assets to others, businesses can establish ongoing revenue streams, creating a sustainable source of funding.

Seed fund

Seed funds offer small startup capital investments, typically less than $50,000, in exchange for a small equity stake, mentorship, and sometimes access to incubator space. These investments are often structured as convertible notes, which start as debt and later convert into equity. Seed funds frequently focus on specific industry sectors such as software, hardware, life sciences, and medical fields, tailoring their support and resources to the needs of these industries.