As an owner of a start-up business or key executive of an established business, you know all too well how access to financial capital – aka money – can dramatically impact your business.  Some entrepreneurs are focused on growing their businesses through angel investments and venture capital.  Others “self-fund,” “bootstrap” or “revenue fund” their businesses.

Regardless of your stage and philosophy of how to fund your business, access to different types of funding and lending options is important. Entrepreneurial subscription businesses that are planning for angel and venture capital may need loans or grants to bridge gaps in their fundraising time line.  Bootstrapped startups can also use a little of the green stuff to ease cash flow, establish working capital, buy inventory, lease office or warehouse space, or invest in technology while keeping true to their “bootstrap” goals.  Both options have benefits and challenges. 

Fortunately, there are many funding options for small companies to get their subscription businesses off the ground or scaling to high growth, whether they want to launch a new SaaS, mobile, content or subscription box company. In this primer, we’ll give you a rundown of the options available, including traditional and alternative financing.

U.S. Small Business Administration

We’ll start with the resource you are probably most familiar with – the U.S. Small Business Administration, commonly referred to as SBA. SBA offers a variety of financial assistance programs for small businesses for different purposes, including debt financing, surety bonds and venture capital. One thing the SBA does not provide is grants for starting or expanding a business.

Guaranteed Loan Programs (Debt Financing)

SBA is not a lender, but it sets guidelines for small business loans which are then made through third-parties such as lenders, community development organizations and microlending institutions. SBA guarantees these commercial loans will be repaid, making loans to new businesses less risky and more attractive to potential lenders. SBA-guaranteed loans, however, may not be made to a small business if the owner has access to other financing on reasonable terms.

Venture Capital Program

The SBA’s Small Business Investment Company (SBIC) Program is a way for a new business to secure venture capital through a public-private investment partnership that helps fill the gap between the availability of growth capital and the needs of small businesses. While the SBA does not invest directly in the businesses, it relies on the expertise of qualified private investment funds. The SBA licenses these funds as SBICs to supplement the capital the business raises from private investors with access to low-cost, government-guaranteed debt. SBICs limit their investments to qualified small business concerns as defined by SBA regulations.

With these two sources of capital, SBICs search the country for promising small businesses who need debt or equity financing. SBICs are similar to other investment funds in how they operate and their interest in high rates of return, but SBICs limit their investments by only investing in qualified small businesses as defined by the SBA.

As an example of the SBIC program’s success, in 1978, Steve Jobs of Apple fame received a half million dollars from a venture capital fund supported by the U.S. SBA. We all know how that turned out. AOL, Intel, Compaq and Sun Microsystems also received SBIC funding in their early days. Other SBA success stories include Build-a-Bear, Tesla, Fed Ex, Costco, Yankee Candles and Under Armour, among others.

Bonding Program (Surety Bonds)

The SBA’s Surety Bond Guarantee (SBG) Program will probably not be utilized by a subscription business, so we’ll just cover it briefly. The SBG Program helps small business contractors who cannot otherwise get a surety bond through normal channels. The bond is a third-party instrument between a surety, a contractor and a project owner. Essentially, the agreement requires the contractor to comply with the terms and conditions of the contract. If for some reason the contractor cannot fulfill the contract, the surety takes over to get the project completed as agreed.

Through this program, the SBA makes an agreement with a surety that guarantees the SBA will assume a percentage of the loss if a contractor breaches a contract. This guarantee serves as an incentive to sureties to provide bonding for qualifying contractors. The SBA can guarantee bonds for contracts up to $5 million, covering bid, performance and payment bonds, and up to $10 million for certain types of contracts.

SBA Loan Programs

SBA offers a variety of loan programs to meet different needs of small businesses, some of which will not apply to subscription businesses:

1. General Small Business Loans: 7(a)
2. Disaster Loans
3. Microloan Program
4. Real Estate & Equipment Loans: CDC/504

1) General Small Business Loans 7(a)

This is the SBA’s most basic and most popular loan program. It includes financial assistance for businesses that meet special requirements. 7(a) loans are flexible, longer term and have potentially lower down payments compared to other financing options. 7(a) loans help small businesses pay for startup costs, purchase equipment and inventory, and to serve as working capital.

• Eligibility: Eligibility is based on specific aspects of the business and its principals, including how the business generates income, the character of its ownership and where the business operates. SBA does not specify which businesses are eligible, but it does say which businesses are not (e.g., life insurance companies, companies based outside the U.S., lenders, etc.). Generally speaking, eligible businesses must operate for profit, meet the SBA’s definition of a small business, use the funds for a sound business purpose, etc. Additional requirements can be found at SBA.gov.
• Use of loan proceeds: SBA loan proceeds must be used to establish a new business or to assist in the acquisition, operation or expansion of an existing business. For example, a subscription company could use 7(a) loan proceeds as long-term working capital, short-term working capital such as seasonal financing or to purchase equipment, machinery, furniture, fixtures, supplies or materials. Loan proceeds cannot be used to refinance existing debt if the lender will lose money or the SBA would sustain a loss, to repay late state or federal withholding taxes, among other restrictions. Additional information is available at SBA.gov.
• Repayment terms: SBA’s loan programs tend to be for longer term financing for small businesses based on a borrower’s ability to repay, the purpose of the loan and the useful life of the assets financed. There is a maximum repayment period of 25 years for real estate, 10 years for equipment and 7 years for working capital. Shorter term loans and lines of credit are also available. Repayment is typically made monthly with payments comprised of principal plus interest. 7(a) loans are fully secured. See SBA.gov for additional information about maturity, amortization and collateral.
• Loan amounts, fees, interest rates and guarantees: The specific terms of an SBA loan are negotiated between the borrower and SBA-approved lender. There is no minimum loan amount, but the maximum loan is $5 million. The average 7(a) loan amount in 2015 was $371,628. SBA-guaranteed loans are assessed a guarantee fee, based on the loan’s maturity date and the dollar amount guaranteed. Fixed and variable interest rates are available. The maximum rate includes a base rate (Prime Rate, London Interbank One Month Prime plus 3% and an SBA Peg Rate) and an allowable spread. SBA can guarantee up to 85% on loans up to $150,000 and 75% on loans over $150,000. SBA’s maximum exposure is $3,750,000, which is 75% of the maximum loan amount of $5,000,000. SBA Express loans have a maximum guarantee of 50%. For more details, visit SBA.gov.
• Loan application checklist:

1. SBA loan application
2. Statement of personal history and personal financial statement
3. Business financial statements (profit and loss statement, projected financial statements)
4. Ownership and affiliations
5. Business certificate or license
6. Loan application history
7. Income tax returns – personal and business
8. Résumés for each principal
9. Business overview and history
10. Business lease
11. Additional information if you are purchasing an existing business 

Click here for additional details, including form numbers and descriptions.

• Loan processing time: There are two processing options for SBA loans: standard processing time and SBAExpress which offers accelerated turnaround time. A response is provided within 36 hours, but it must meet certain criteria. Additional details are available at SBA.gov.
• Special types of 7(a) loans:
  • CAPlines: loans up to $5,000,000 to help businesses meet short-term and cyclical working capital needs. There are four types of CAPlines loan programs:
    • Contract Loan Program: finances costs associated with contracts, subcontracts and purchase orders.
    • Seasonal Line of Credit Program: supports the buildup of inventory, accounts receivable or labor and materials above normal usage during seasonal peaks.
    • Builders Line Program: financing for small contractors or developers.
    • Working Capital Line of Credit Program: a revolving line of credit up to $5,000,000 for short-term working capital
• SBA Export Loan programs: designed specifically for export activities
  • Export Express Loan Program: financing up to $500,000 for business purposes that support a company’s export development.
  • Export Working Capital Program: provides advances up to $5,000,000 to fund export transactions from purchase order to collections.
  • International Trade Loan Program: provides up to $5,000,000 for fixed assets and working capital for companies to start or continue exporting.
• Advantage loans
  • Rural Business Loan
  • Community Advantage Loan
  • Small Loan Advantage

2) Disaster Loans

The SBA provides low-interest disaster loans to businesses of all sizes, private nonprofit organizations, homeowners and renters to repair or replace items damaged or destroyed in a declared disaster including personal property, machinery and equipment, and inventory and business assets.

Disaster loan types include:

• Home and personal property loans
• Business physical disaster loans
• Economic injury disaster loans
• Military reservists economic injury loans

See SBA.gov’s Disaster Loans page for details.

3) Microloan Program

SBA’s Microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is $13,000. SBA provides the funds to specially designated intermediary lenders which are nonprofit community-based organizations with experience with lending, management and technical assistance.

Microloans can be used for working capital, inventory or supplies, furniture or fixtures, machinery or equipment. They cannot be used to pay existing debts or to buy real estate. Interest rates vary, but they are generally between 8% and 13%. The maximum repayment term for an SBA microloan is six years. Visit SBA.gov for additional details, including a listing of participating intermediary lenders.

4) Real Estate & Equipment Loans: CDC/504

This SBA program is specifically for financing major fixed assets including equipment or real estate. To be eligible for this type of SBA loan, a small business must meet certain criteria including operating as a for-profit company, doing business in the U.S. or U.S. territories, having a net worth less than $15 million and average net income less than $5,000,000 after taxes for the previous two years and be an eligible type of business. Visit SBA.gov for additional information including eligibility, use of loan proceeds, loan terms, how to apply and more.

 For more information about SBA’s loan programs, check out the organization’s video series for two to four minute explainers on SBA financing options.

Additional Funding Sources

Of course, SBA is not the only funding sources. There are other options available including:

• Personal resources
• Crowdfunding
• Venture Capital
• BusinessUSA Financing Tool
• Research Grants for Small Businesses
• Miscellaneous

Personal Resources

Personal resources – savings, retirement funds, lines of credit, assets, investments from friends and family, etc. – are one source of potential capital to help fund a business. As part of any business plan, you’ll need to have your personal finances in order to see what assets and liabilities you have, as well as your overall net worth. You may be need to utilize your personal assets to help fund a business, but do so with caution and with input from your legal, financial and business advisors.

Crowdfunding

Crowdfunding is another way to fund a project or business by raising money from a large number of people using an online platform like Kickstarter, Indiegogo, RocketHub and Crowdfunder. Each site has its own advantages and disadvantages, fees, features, etc. Hongkiat does a good job of outlining them here.

While Kickstarter is perhaps the most widely known, Crowdfunder was specifically designed for raising venture capital with a network of more than 12,000 venture capitalists and angel investors actively investing in Crowdfunder deals.

Venture Capital

Venture capital is an alternative funding source, a type of equity financing that helps startups get the resources they need to start or grow a business. Investors are willing to help fund a new business in exchange for a share of ownership in the company. As SBA.gov points out, venture capital differs from traditional financing in these ways:

• Venture capital is more commonly offered to young companies with potential for high growth.
• Venture capital invests equity capital rather than debt.
• Venture capital funders take higher risks investing in a new company, so they expect higher returns.
• Venture capital has a longer investment horizon than traditional financing sources.
• Venture capital funders are more active in the companies they fund, sometimes serving on the board of directors or helping with strategic marketing, governance or capital structure.
• Venture capital is often sought when funding is not available from more traditional sources.

Essentially, venture capitalists provide a startup with a financial cushion from which to operate. The seed money often comes from affluent individuals, also known as angel investors, and venture capital firms who specialize in funding startups. Because it is an active form of financing, versus passive financing, investors want to be actively involved in the new organization, and they will typically share in the investment with like-minded individuals. For more on venture capital, visit SBA.gov.

BusinessUSA Financing Tool

The BusinessUSA financial tool can help subscription companies identify other government financing programs that may be available to them. To learn more and to use the “access financing” wizard, visit BusinessUSA.gov. The wizard will ask basic information about your business, including your zip code, reason for seeking financing and special status (e.g., female, minority, etc.) and return lending options that may be available to you. Similar to SBA, BusinessUSA is not a lender, but rather a resource for small businesses seeking funding.

Research Grants for Small Businesses

Small businesses involved in scientific research and development may qualify for a federal grant under the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Subscription companies are unlikely to be involved in R&D, so we won’t delve into this topic further, but visit SBA.gov for additional information about these programs.

Miscellaneous

• HubZone Program: HubZone is another program available through the SBA. To qualify for the program, a business must be located in an area designated as a Historically Underutilized Business (HUB) Zone. There are a number of restrictions. Visit SBA.gov. for details.
• Small Business Lending Fund:  The Small Business Jobs Act of 2010 created the Small Business Lending Fund (SBLF), a dedicated fund to provide capital to qualified community banks and community development loan funds. The U.S. Treasury Department has invested over $4 billion in 332 institutions through this program. There are more than 3,000 locations in 47 states and the District of Columbia. Click here for a list of participating lenders.
• SmartBiz Loans:  SmartBiz Loans makes the SBA loan application process faster and easier. Borrowers can get loans up to $350,000 with a variable interest rate between 6.25% to 7.25% (Prime plus 2.75% to 3.75%) and 10-year terms. Pre-qualifications for loans between $30,000 and $350,000 can be done in 5 minutes without impacting your credit score, and funds can be available as fast as 7 days after the application is complete.

There are additional funding options like OnDeck and Kabbage for small business owners with poor credit or who are willing to try riskier funding mechanisms like invoice factoring, but they carry higher risks and steep interest rates. For example, Fundbox, an invoice factoring company, will advance up to 100% of the value of an invoice, but the annual percentage rate for such loans range from 44% to 64%, says Marc Prosser for Forbes.

We encourage you to be wary of some of these alternative funding sources. Make sure you fully understand the repayment terms, interest rates, and loan origination and other fees involved. Consult your business advisory team before making any financial decisions.

Additional Resources

SBA goes beyond offering funding opportunities for small businesses. It offers guidance and connects business owners with additional resources. Here are a few that new subscription companies might find useful as they plan for their first two years in business:

• 100 Most Active SBA 7(a) Lenders
• Canada Small Business Financing Program
• Economic Development Agencies (by state)
• Financing Options for Small Businesses, SBA self-paced training exercise
• SBA LINC: Connecting Borrowers with SBA-Approved Lenders
• SCORE, free small business advice
• Small Business Development Centers (SBDCs), small business advisory services
• Starting a business, business planning, etc.