Finding sources of small business financing at this stage is often a better alternative than finding investors. Some businesses will eligible for term loans, such as the Small Business Administration backed loans offered through banks. Generally, all term loans, such as SBA notes or mortgages, are secured with collateral. A business still in the customer discovery phase may be short of collateral which is why many business owners often jump right to finding investors. However, there is another alternative, the unsecured business line of credit.
A warning is needed here. Even though a business line of credit is not secured with specific collateral, it will still require the personal guarantees of the business owners, as do most other sources of small business financing. The advantages of an unsecured business line of credit over a term loan are:
- They are based on the creditworthiness (FICO scores) of the borrower and not the value of a secured asset; And
- You only pay interest on what is actually borrowed. As borrowed funds are paid back, not only is interest reduced but your credit "reserve" is increased.
Business Credit Cards
A credit card is a line of credit. Credit card strategies are often used for amounts up to $100,000 (sometimes more). Lenders will issue these to business owners; however, there are many considerations to a credit card strategy, including cost and impact on the owner's personal FICO score. Consider using a business credit card consultant to assist in the development of an appropriate strategy for your specific situation.
Business Line of Credit
A line of credit arrangement with a lender becomes appropriate for amounts over $100,000. These can range as high as several million dollars as long as the creditworthiness of the owners and the use of funds support it. The costs are somewhat higher than term loans and typically lower than pure credit cards. Unsecured business lines of credit went away during the banking crisis; however, sources, are starting to appear for small business financing providing sales have reached at least $500,000 and there is 3 years of business history.
Raising cash through selling equity has it's place, especially in financing ongoing growth. However, selling ownership can be too expensive at the wrong time. Consider alternative sources.