Since March, the global economy has been thrown for quite a loop. Between social distancing, intermittent shutdowns and unclear stimulus packages, many business owners have been left wondering how to stay afloat through this crisis.
What's more, in response to the coronavirus pandemic, many lenders and investors have put temporary holds on any new funding. Business owners who historically would've looked to banks, venture capitalists and other lenders or investors for normal business financing are now struggling to come up with ways to finance their operations.
While many conventional funding streams have dried up – at least temporarily – there are still some traditional ways that businesses can get much-needed cash.
Here are some of the best ways that business owners can get the cash they need to continue funding their operations through this crisis:
The best sources of business cash
|Friends and family||Flexible terms, quick closing, handshake deals|
|SBA loans||Extremely low interest rates; some loans can be forgiven|
|A HELOC||Revolving credit that's fully secured|
|Unsecured loans||Totally dependent on personal credit|
|A 401(k) loan||Borrow from yourself and pay yourself back|
|Freed up short-term debt||Consolidate debts and improve your credit|
|Negotiated terms||Delay payments to keep cash longer|
Not all of the above options are going to be right for all business owners. For some, they may not even be an option. But for businesses that need cash, these are among the top traditional ways that businesses can get the capital they need during these turbulent times.
1. Friends and family
Borrowing from friends and family is one of the most common ways for businesses to get much-needed cash when other options aren't available. Funds provided by friends or family can be structured as either loans or direct equity investments. In either case, this type of funding is usually on fairly agreeable terms.
Some cases where it may make sense to ask for money from friends or family include if
- You already have family members who are either involved in or are dependent on your business.
- You have friends or family who live close by and can keep tabs on their investment.
- Your family or friends are astute investors who can help oversee or advise on things like legal or accounting for your business.
- Your friends or family are involved in related businesses and investing in your business gives them the opportunity to create additional value through a strategic partnership.
2. U.S. Small Business Administration loans
Historically, U.S. SBA loans have been reserved for businesses that can't get funding elsewhere. However, since the outbreak of COVID-19 and the ensuing economic slowdown, the role of the SBA has changed significantly. Instead of acting as a lender of last resort, the SBA is now acting, in many cases, as a lender of first resort, especially through the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program.
Using an SBA loan, you can get access to long-term capital for your business at low interest rates. Depending on the loan program you select and how you use the proceeds of the loan, you may qualify to have all or some of your loan forgiven.
An SBA loan may make sense for your business if
- Your business has payroll expenses that can be leveraged through the SBA's Paycheck Protection Program.
- Your company structure and intended use of funds may qualify you for loan forgiveness.
- You understand and can comply with the SBA's affiliate rules, tax consequences related to your loan type, restrictions on the use of funds, etc.
3. Home equity line of credit
A home equity line of credit (HELOC) lets individuals borrow against the equity they have in their homes. Lenders usually let homeowners borrow 75% to 80% of a home's fair market value, and that 75-80% can be divided among a traditional mortgage and a HELOC.
If you bought your home more than five years ago, prices have appreciated in your area, or if you made a down payment of more than 25% when you bought your home, you may have equity in your home that you can tap into to help fund your business through this crisis.
A HELOC may be your best bet if
- You already have an equity line in place.
- You owe little on your home relative to its market value.
- You have a sound relationship with a bank – especially a community bank – that can help you set up a HELOC quickly.
Business owners who choose to use a HELOC to help fund their businesses need to be very careful about how they treat the proceeds of their loan.
When you use personal money (such as funds from a HELOC) to fund your business, you need to make sure that you deposit the proceeds of your home equity line into your business bank account and use the funds from there. If your business is incorporated as an LLC, LLP, S corporation, or C corporation and you use personal money to pay your business bills directly, you accidentally give up liability protection, should you need it later on.
Paying your business bills personally may let someone pierce the corporate veil if something happens later, so it's very important to keep your business and personal finances separate.
4. Unsecured personal loans
While many lenders have put temporary holds on funding small business loans, there remains a host of online lenders that offer fast, unsecured personal loans. These types of loans require minimal underwriting and little review of your business financials; most simply require a personal credit check and maybe a couple of years of tax returns in order to support your stated income expectations.
The best thing about these loans, though, is that they typically make funds available within a few days. While interest rates on these loans aren't as low as many conventional loans, they can help business owners get the money they need quickly to fund their business.
It's also worth noting that most small business credit cards work much the same way, and many offer 0% introductory periods that businesses can use to fund their business over the next several months until this crisis passes.
An unsecured personal loan or small business credit card may make sense if you
- Have excellent personal credit.
- Have assets outside of your business that can help you make payments during the economic downturn.
- Want fast capital, since loans usually get funded within a few days.
Like HELOCs, business owners who choose this option need to keep a careful accounting of the use of their funds. Money shouldn't be used to pay your company's bills directly; instead, deposit the funds into your business account and then pay your bills.
5. A 401(k) loan
A 401(k) loan lets people borrow against their retirement assets and use the money for just about anything. What's more, the recently passed CARES act allows account holders to borrow up to $100,000 from their 401(k), as opposed to the old limit of $50,000.
This may only be an option if your 401(k) administrator allows plan participants to borrow against their accounts. If you don't have a 401(k) for small business or haven't set up your plan to allow for participant loans, then this option may not work for you.
However, the CARES Act also allows taxpayers who have funds in retirement accounts, including 401(k)s and IRAs, to take early distributions from those accounts without being assessed the usual 10% penalty. If you have assets in retirement accounts that can't be borrowed, taking an early distribution to help fund your business may make sense, especially if you're going to have business losses that will offset the income from your distribution.
Consider a retirement account loan if
- You have substantial assets tied up in retirement accounts.
- You think you can earn a higher return investing in your own business than you can in the stock market over the next 12 to 24 months.
Like HELOCs and personal loans, this option is another way of using personal funds for business, so be careful with your accounting. Funds that you borrow or withdraw from retirement accounts should fund your business and should be reflected as capital contributions from you to your business before those funds are used for business purposes.
6. Refinance short-term debt into term loans
Refinancing short-term business debts involves taking out a new long-term loan and using the proceeds to pay off short-term debts like business credit cards, merchant cash advance balances, and business lines of credit.
Consolidating or refinancing business loans in this climate may be a little tricky. But if you can find a lender who can do it, it can help you lower your total monthly payments, potentially save money in interest charges, and free up a lot of short-term debt that you can use to fund your business in the near term.
If you can't find a traditional lender, you may be able to use an SBA loan to refinance your business debt, though probably not through the PPP or EIDL programs.
Consider consolidating or refinancing your short-term debt if you
- Have short-term loans like credit cards and merchant cash advances but little long-term debt.
- Have a relationship with a bank that can provide a long-term loan, or if you qualify for an SBA loan.
- Can lower your average interest rate by refinancing, even if it's through a loan from friends or family.
7. Negotiate terms with vendors
Every business has suppliers. Whether they provide goods or services for your company, they're probably feeling the stress of the recent slowdown and want to get paid, too. With so many businesses worried about who will withstand this crisis, many vendors may be willing to take payments over longer periods of time. Or they may be willing to settle outstanding invoices now at a discount. Either way, negotiating terms with your vendors and suppliers may help you get (or keep) the cash you need to fund your business in the short term.
You may want to consider negotiating payment terms with your vendors if
- You have a good, long-standing relationship.
- You're an important client.
- You can do so without unfairly impacting them.
- You may not be able to pay them at all under current terms (you both win if you renegotiate).
Alternative methods of funding can serve as small business lifelines
These are unusual times, and business owners need to do whatever they have to in order to make sure their business makes it through this crisis. Things will get better; lenders will start lending again, and customers will start spending again. In the meantime, these are some of the ways that business owners can get the cash they need to ensure that they make it through these near-term struggles.
If one of these options sounds like it may make sense for your small business, act decisively but carefully. If you use one of the options that lets you access personal money or credit for business purposes, keep an accurate accounting while paying your bills to keep your business afloat.