Lending Library

When financing major equipment for your small business, many lenders may require you to purchase a specific type of insurance that protects the value of your purchase. It's called equipment breakdown coverage and helps you pay for repairs caused by covered events. Here's what you need about this type of insurance and why it's so important. 

What is equipment breakdown coverage?

Many businesses rely on equipment to keep operations running smoothly. Whether you run a restaurant with tons of kitchen appliances or a construction business with heavy equipment and machinery, it's important to keep everything up and running so you can keep your customers happy and your balance sheet healthy.

Equipment breakdown insurance covers repair costs when certain events occur. If your equipment is financed, your lender may require you to have a policy in place. Even if your equipment is paid in full, this coverage can still be useful. Note that this coverage is separate from your commercial property insurance, which covers only damage due to external factors such as fire or theft.

When a covered event occurs, you can file a claim to get paid to fix the equipment. There's usually a limit to how much each piece is covered for, and you may also have to pay a deductible before your coverage kicks in.

What does equipment breakdown coverage cover?

Here are common events that are covered in most equipment breakdown insurance policies. 

Covered incident repairs.

Your list of covered incidents will likely vary depending on the type of equipment insured. Damage caused by power surges, burnouts, or other mechanical breakdowns are typically covered. And you could also be covered for any related inventory damage because of the breakdown. For instance, if your restaurant's refrigerator stops working, you could be reimbursed for any food spoilage in addition to the actual repairs.

Temporary or rush repairs.

Working equipment is vital to the success of your business. That's why your policy should also include coverage for rush repairs and temporary fixes. You need to keep operations running, even if it costs more to get a contractor out there the same day. You'll minimize the financial impact of your equipment breakdown on your broader business. Check policy details to understand any restrictions surrounding rush repairs. 

Lost business income.

There are many requirements your claim must meet in order to be eligible for lost business income coverage. But it's an important component that's usually included in this type of insurance policy. 

The idea is to get reimbursed for any revenue you couldn't collect because of an equipment breakdown. There must be a direct and well-documented correlation between the loss of income and damage to your equipment. There may also be a minimum interruption period you must get through before your policy goes into effect.

Property damage liability.

Liability coverage is a must for any business and your equipment coverage insurance should have a property damage clause. This provides reimbursement for anyone else's property that is damaged related to the equipment breakdown. 

Mandatory inspections

Another benefit of equipment breakdown insurance is that your policy may cover mandatory inspections. The goal is to identify issues before they arise, ultimately saving you (and your insurance company) money.

What equipment breakdown insurance does NOT cover.

Not all issues are covered by an equipment breakdown insurance policy. Here's what won't be covered, so you can plan accordingly.

• Damage from everyday wear and tear - Breakdown due to age or lack of maintenance is not included in most policies. 
• Software or data - Software-related malfunctions, even if purchased with equipment financing or equipment leasing, are not included in your coverage. You'll need separate business insurance to cover cyber attacks and any other issues related to software.
• Repairs beyond coverage limit - Your policy will come with a limit to how much you can claim with each covered event. It's typically based on the value of the equipment (or a percentage of that value).
• Deductible or coinsurance - Your insurance policy may come with a deductible, co-insurance, or both. A deductible is the amount you're responsible for with each claim before your coverage kicks in. Some policies may also include coinsurance, which is a percentage of the repair costs that you're responsible for.

How to use equipment breakdown insurance with equipment financing.

Most lenders require that you get an equipment breakdown policy whenever you finance your equipment. It's a smart financial safety net that keeps your important assets covered so you can avoid setbacks to your business when issues arise. As you explore adding more equipment to your business, remember this added cost of insurance as well. Preparation is always the key to success.

Learn more about how equipment financing can help grow your business with Lendio.

Private equity (PE) is often tangled with venture capital (VC) because they both invest in companies and use a variety of exit strategies, such as selling their stake during IPOs. However, there are some significant differences in the way they do business. Both invest in different types and sizes of companies, spend different amounts and even claim different percentages of equity.

Let’s have a closer look at the core differences between PE and VC firms, and try to characterize the variables that are pushing them to adopt one another’s strategy.

Private Equity

What is Private Equity?

Private equity is a form of investment that is much more hands-on than a venture capital investment. Instead of investing to own a stake in the company, a private equity firm acquires the entire company in the form of a buyout. 

Usually, the company in question is facing some type of difficulty or is distressed in some way. The PE firm evaluates the company and has a plan for how to resurrect it and make it more valuable. There's also usually an exit strategy in mind to sell the company within a few years in order for the PE firm to turn a profit. 

Who funds these private equity deals? In most cases, the answer is institutional or accredited investors. This includes investors such as:

• Pension funds
• University endowments
• Insurance companies
• Sovereign wealth funds
• High-net worth individuals or family offices

Types of Investments

Private equity funding can be packaged in a few different ways. The most common types of deals are buyouts, secondary buyouts, and carve-outs. Here's what each of these means.

Buyout 

This is the most well-known of private equity deals. A PE firm acquires an entire company to gain complete control of major decisions. The strategy can be used on private, public, or closely held companies. 

Secondary Buyout 

With a secondary buyout, a PE firm buys a company from another private equity group instead. The reasoning may be to fix a distressed company or to acquire a company to work with other relevant companies owned by the purchasing PE firm. 

Carve-out 

Instead of purchasing an entire company, a carve-out allows a PE firm to purchase a certain division of a company. It usually does not involve the parent company's core operations.

Venture Capital

What is Venture Capital?

A venture capital (VC) investment is a type of private equity, but instead of focusing on established companies, investors typically pick startups with the potential for major growth. VC investors can include individuals, investment banks, incubator programs, other types of financial institutions, and corporations.

In exchange for an investment, venture capitalists typically gain ownership of a percentage of the business. When profits are distributed or the company is sold, the investor gets that percentage of the total. 

For example, if a VC investor invests $250,000 for 15% equity, then the startup gets acquired five years later for $10 million, the investor's 15% stake will result in a $1.5-million payout. 

Types of Investments

There are usually two types of investments venture capitalists make in startups: an initial seed round of funding or a range of series funding as the company becomes more established.

Seed Funding

This is typically the first round of formal investment for startups. Some may have had a pre-seed funding round, which usually just raises capital from the founder's family and friends. In the seed round, the startup is still at an early stage, but has a concept and early proof of concept to entice VC investors.

Series Funding

As the startup becomes more established, it may opt to engage in additional rounds of funding. Each round is given a new title in succession: series A, B, C, D, and even E funding. Typically the company raises more money in each round.  

• Series A funding: $2 to $15 million
• Series B funding: $7 to $10 million
• Series C funding: average of $26 million

Private Equity Vs Venture Capital

Core differences: PE Vs VC Firms

Private equity firms buy established, inefficient companies, take total control, and make them more efficient to escalate revenue. They also attempt to capitalize on mispriced assets. 

Venture capital firms, on the other hand, purchase only 50% or smaller stakes in startup companies that they believe have the greatest growth potential.

While PE firms invest in a specific company and concentrate their expertise on a particular sector, VC firms like to diversify and reduce their risk profile. Usually, VC firms are limited to technology, biotechnology, and clean air companies. VC firms also often limit their investment to $10 million in each company. PE firms are open to how much they invest, particularly since they're usually buying out an entire company.

The core difference between the two is where they put their money. PEs invest in established businesses while VEs invest in startup growth.

Risk and Return

VC firms understand that most of the companies they invest in will not be profitable. But  they expect that at least one of them will turn in huge profits and make the fund profitable. Because startups can be so unpredictable, they basically hedge their bets across multiple investments. 

Fred Wilson, a $1-billion, New York-based VC fund, expects that out of the 25 growth companies it has invested in, about 10 will fail, one will turn extraordinary profits, about five will give solid returns, and the rest will be wiped out. 

Another key difference between VC and PE? VC firms use only equity to finance their purchases, but private equity investors use both equity and debt.

Additionally, PE firms have concentrated exposure in one or a few particular industries, so they have to bear additional risk. Their holdings in the companies are so extensive that, if one of the companies failed, the fund would mostly fail. However, shouldn’t higher risk translate to higher returns?

Modern portfolio theory proposes that greater risk is compensated with higher returns, but here, VC firms, even with the higher risk, are targeting the same returns as PE firms, and actual returns for both, are also very similar.

Small business owners who want to retain full ownership of their companies will most likely want to avoid outside investment. 

Instead, apply for a small business loan to get the exact amount of financing you need without having to give up equity in your company. 

Crowdfunding is a term used to describe individuals coming together to support—and directly fund—projects by other individuals and organizations. For small businesses and startups, crowdfunding can be an engine for job creation and development.

Compared to other methods of raising money, crowdfunding is very new, but has nonetheless already provided many businesses with the capital they needed to jumpstart and expedite their growth and potential.

Types of crowdfunding.

Types of crowdfunding.

Prospective and established small business owners can use crowdfunding platforms to jumpstart their next project, and there are four models of crowdfunding they employ to do so:

• Donations, philanthropy and sponsorship - Like it sounds, this form of crowdfunding involves people donating money for nothing in return.
• Lending - Also known as peer-to-peer lending, this model involves individuals lending a certain amount of money to be repaid with interest.
• Equity-based crowdfunding - The company sells shares of the company.
• Rewards-based crowdfunding - Anyone who donates money receives a reward, such as a discounted product or swag.

Anyone with questions about crowdfunding should first decide what they’re willing to give (if anything) and how they intend to excite potential donors to invest in their company.

How crowdfunding works.

How does crowdfunding work for businesses?

For a business that wants to use crowdfunding to raise capital, the first step is to decide what type of crowdfunding it wants to pursue. All types are available to small businesses, but there are benefits and drawbacks to each. 

Businesses that want to avoid paying additional taxes may want to steer clear of a rewards-based crowdfunding campaign. While the reward is given in exchange for a "donation," to the IRS, it is a sales transaction and is considered taxable income. 

To start a crowdfunding campaign, you’ll need to choose a crowdfunding platform. Crowdfunding platforms revolve around a specific type of crowdfunding. They're all a little different and are often aimed at specific demographics.

Once you've decided on the type of crowdfunding campaign you want to run, you will need to create a campaign page that explains what you need the money for and how you intend to spend it. Successful campaigns often provide videos to help motivate and excite donors.

Do crowdfunding sites charge money?

Yes, they do. The amount varies with each site, but it’s not uncommon for platforms to charge 5% or more of the total funds raised, plus a transaction fee for each donation. If you have an exact amount you need for your small business, you’ll need to calculate the fees when determining how much you need to raise.

Can crowdfunding money be used for anything?

Any money raised through crowdfunding must be used for the exact purpose stated to the public. Therefore, if you state that you need the money to cover manufacturing costs, you cannot turn around and use any funds raised to purchase stock or real estate.

Crowdfunding pros & cons.

The pros and cons of crowdfunding.

Consider the following pros and cons when considering using crowdfunding to fund your business.

Pros:

• Serves as a marketing tool - Crowdfunding can be a company’s first exposure to the world and can therefore be used as a means to advertise to the general public
• Provides a forum for feedback on the project - It’s common for investors to provide needed feedback on a service or product they have invested in; this feedback may be essential for your company’s long term success in the market
• Fees are minimal - Crowdfunding platforms take only a small percentage of the funds you raise from investors 
• Inexpensive way to raise funds - No traveling is needed to speak with investors, nor does it cost that much to establish. You can spend money to launch and run a campaign, but the amount you spend is up to you.
• Can make it easy to communicate to your investors - With all of your investors in one spot, communicating to them is a lot easier.
• May not have to give up equity depending on which type of crowdfunding campaign you choose - Equity crowdfunding is just one type of crowdfunding. Other methods don’t require selling portions of your company, which means you will be able to keep more of the profits for yourself.
• Is a valid alternative to bootstrapping and debt - Not too long ago companies had very few options when it came to raising money, but crowdfunding has changed that.
• Can create excitement over your project or product - Smart companies realize that raising money through a crowdfunding campaign is only one benefit—the other is generating buzz and excitement pre-launch. 
• Provides partial proof of concept - While a successful crowdfunding campaign is not complete proof of concept, it is still a very good sign. Full proof of concept is only established once the product or service is launched and is financially successful

Cons: 

• Often limited on amount of funding you can raise - Companies can not raise more than $5 million in a 12-month period
• Exposes project to the public, risking copycats - it’s not uncommon for companies to avoid crowdfunding altogether if they are currently unable to afford a patent because some companies use crowdfunding sites to get ideas for new products 
• Funds may be subject to securities regulation - Companies selling securities via crowdfunding must comply with all federal security laws, regardless of the platform they choose
• Takes a lot of work to find investors - It’s unlikely investors will find your page on their own and give you money. Successful campaigns often involve full-blown social media activity to attract attention.
• Takes a lot of work to create a campaign - Making a donation page, shooting a video, and filling out all of the appropriate paperwork takes more time than you may be willing or able to give.
• Dwindled influence of the crowdfunding model - Thanks to too many scammers, some investors have grown weary of crowdfunding altogether.
• Does not necessarily show proof of concept - There are many examples of "successful" campaigns that did not translate to the real world of business. 
• Can be expensive to get going - If you contract your campaign’s creation, you may end up having to spend more than you want.
• Too much competition on crowdfunding sites - Just creating a campaign is unlikely to be enough, and it can take a lot of work to have your project stand.

Crowdfunding sites

Crowdfunding sites

Popular crowdfunding sites include:

• Indiegogo
• Classy
• Seedinvest
• FundRazr
• Fundly
• Startengine
• GoFundMe
• Mighty Cause
• Kickstarter
• Fundable
• WeFunder
• EquityNet
• Patreon

To choose the best crowdfunding site, decide which type of campaign you want to create and compare the fees charged on each. It’s rare for investors to scroll through campaigns. Instead, many learn about investment opportunities on forums and social media. Therefore, don’t worry too much about where you launch your campaign because everything comes down to how it’s promoted. 

Crowdfunding tips

Tips for a successful crowdfunding campaign.

Like any other type of business financing, crowdfunding requires strategic thought, upfront work and a commitment to reach out to potential investors. Consider the following tips when planning your crowdfunding project.

1. Choose the right site for you - Some sites occupy a specific niche, such as arts or nonprofits. Find the one that fits your business and your ideal donor demographic. You can run multiple campaigns at the same time through different sites, but you will want to consider how. 
2. Set a realistic target and time limit - Asking for too much or too little can affect your project’s chances of success.
3. Create a campaign video - A personal touch—which video excels at— can pay off. In fact, projects with videos outperform those without by 125%.
4. Post regular campaign updates - Keep supporters engaged to maintain momentum. The more buzz and excitement you can generate and maintain for your project, the more likely your donors will recommend your project to their peers. If done correctly, they may even promote your campaign for you. 
5. Connect with friends and family first - Begin with word of mouth among your inner circle, then promote your campaign on social media. Some donors are more likely to contribute if they feel the campaign is already in motion and gaining traction. 
6. Offer rewards - Supporters may be more eager to back you if you offer a small incentive. Just remember that doing a rewards-based crowdfunding campaign means you will pay tax on any money received. 

Crowdfunding is an exciting new way to raise money for your small business, and there are a lot of opportunities to be had. However, you may still require additional capital after your campaign ends even if it is successful. 

Learn more about your business funding options today at Lendio.

Financing your business with an SBA loan can help you invest in the things you need to grow your revenue. However, in addition to your financial documents and business plan, some SBA loans come with insurance requirements. When your loan terms come with collateral obligations, that property also needs to be covered with a hazard insurance policy. 

Here's what to know about hazard insurance and when you need it.  

Hazard Insurance Explained

Hazard insurance is a type of business property insurance that covers damage caused by accidents or natural disasters. Your insurance policy will outline "covered events." These are the types of events that may occur and cause damage. When that happens, your hazard insurance kicks in and covers the damage (within the limits of your policy).

Most hazard insurance policies include the following covered events:

• Theft
• Vandalism
• Fire damage
• Some water damage (caused by things like burst pipes, but not natural flooding)
• Storm damage 

In addition to covering the building itself, hazard insurance also covers the property inside. This includes any damage caused to:

• Furniture
• Equipment
• Inventory
• Tools

Limitations Of Hazard Insurance

Hazard insurance policies don't give your business an automatic blank check when a covered event occurs. Each policy comes with a coverage limit for both the building and the property within. So it's important to get a policy large enough to cover a worst-case scenario, such as a total loss.

Your hazard insurance policy will also come with a deductible—the amount you're responsible to pay before your coverage kicks in.

SBA Hazard Insurance Requirements

The SBA hazard insurance requirement applies to property that is used as collateral. Most SBA loans, including 7(a) and 504 loans, require some type of collateral in order to be approved. 

Because it's used as collateral, the property must be properly insured. That way, if there's any damage done that's out of your control, the building can be repaired or replaced and still maintain its value.

Here's the breakdown on hazard insurance requirements for each type of SBA loan:

• SBA 7(a) loans - Hazard insurance is required for loans of $25,000 or more.
• SBA 504 loans - Usually the property being renovated or purchased is used as collateral.
• Microloans - Hazard insurance is not required, but flood insurance might be.
• Economic Injury Disaster Loans (EIDL) - Hazard insurance is required for loans of $25,000 or more.

Types Of Business Property Insurance

Not all insurance companies refer to property insurance as hazard insurance. Instead, they may call it commercial property insurance. Here are some options to explore as you look for coverage required by the SBA.

Commercial Property Insurance

Commercial property insurance is the same thing as hazard insurance. Any covered events provide reimbursement for building repairs, as well as damaged items within the building. With this type of insurance, you would need to file a claim for your business. Then an insurance adjuster would assess the damage and provide you with reimbursement accordingly.

Flood Insurance

Anytime your commercial property is located in a flood zone and used as SBA loan collateral, you'll need a flood insurance policy as well. That's because damage caused by flooding is not typically included in most hazard or property insurance policies. 

To see if you need flood insurance, first visit FEMA’s online flood map tool to see if your property's address is located in a flood zone and then check your need for insurance when you apply for an SBA loan. If you do, you will need to pay an extra premium, but it will be worth the investment, if you're in an area at risk of flooding. 

How To Get Business Hazard Insurance For An SBA Loan

If your commercial property isn't properly insured, you'll need to purchase a hazard policy as part of your SBA loan funding process.

Follow these steps to ensure you're in compliance with your loan terms:

1. Choose a licensed insurance agent - Even though licensed insurance agents typically receive a commission on your purchase, they are best equipped to help you find the right business coverage for your needs. Specifically seek out one who is experienced in meeting SBA loan requirements. 
2. Compare policies - With the help of your insurance agent, compare the terms of all of your hazard insurance policy offers. Compare premium costs and coverage to make sure you get the right balance between the two.
3. Name your lender as the loss payee - It's standard practice to name the SBA, your lender, or CDC as the loss payee on your hazard insurance policy. They have a vested interest in ensuring the property is repaired or replaced. In some instances, they may monitor how the insurance funds are used.
4. Maintain your hazard insurance policy - Keep up with your insurance premiums to stay in compliance with your SBA loan terms. You cannot cancel or reduce the insurance policy unless there is some justification that the insured assets have been reduced or depreciated.

Getting proper hazard insurance is just one step in obtaining an SBA loan. Lendio's team of experts can help you throughout the entire process. Apply for an SBA loan now!

The U.S. Small Business Administration (SBA) offers a variety of attractive loans to small businesses in the U.S. SBA Express loans are one popular loan option you might want to consider if you need no more than $500,000 in funding. Just like other SBA loans, Express loans offer low interest rates and flexible repayment terms that you may not find elsewhere. 

Compared to other SBA loans, however, these financing solutions come with much easier applications and faster approval times. Let’s take a closer look at what SBA Express loans are and how they work, so you can decide if they make sense for your unique situation.

What is an SBA Express loan?

An SBA Express loan is part of the SBA 7(a) loan program, which is the most popular SBA funding option. Upon approval from an SBA-approved lender, you can use the funds for a wide variety of business-related expenses, such as commercial real estate, equipment, working capital, debt refinancing, or business expansion. 

You can choose from the standard Express loan or Export Express loan and lock in up to $500,000 in funding. While repayment terms depend on loan type and purpose, they go up to seven years for lines of credit, 25 years for real estate loans, and five to 10 years for other loans. 

The lender, loan size, and your financial situation will dictate the interest rate you may receive, but SBA Express loans cap out at the prime rate plus 6.5% for loans of $50,000 or less and the prime rate plus 4.5% for loans greater than $50,000. The chart below outlines the key components of these loans.

Types of SBA Express loans.

There are two types of SBA Express loans, including standard Express loans and Export Express loans. Let’s dive deeper into the details of each one.

Standard SBA Express loans.

Standard SBA Express loans are designed for qualifying small businesses that operate in the U.S. or the U.S. territories. The SBA responds to applications for these types of loans within 36 hours. With a standard SBA Express loan, you can borrow up to $500,000 and enjoy an SBA guarantee of 50%. While interest rates max out at the prime rate plus 4.5%, they ultimately depend on your qualifications, lender, and loan amount.

SBA Export Express loans.

SBA Export Express loans differ from standard SBA Express loans in that they’re geared toward exporters. If you’re in search of funding to support export activities for your business, this option is worth exploring. The SBA will guarantee 75% of loans that are larger than $350,000 and 90% of loans that are less than $350,000. Approval times are also shortened as the SBA will respond to applications in no more than 24 hours.

How SBA Express loans work.

You can apply for an SBA Express loan through an SBA-approved lender, which may be a bank, credit union, or online lender. To do so, you’ll need to complete SBA Form 1919 and any other forms the financial institution requires. While down payment requirements vary, 10% is typical and startups may have to put more down. 

Also, if you opt for an Express loan of over $25,000, you will need to back your loan with collateral. If you choose an Export Express, you’ll need to adhere to the particular collateral requirements set forth by your lender. 

Even though each individual lender will make their own eligibility decisions, the SBA will respond to Express loan applications within 36 hours and Export Express loan applications within 24 hours. This is much faster than the five to 10 business days the SBA usually takes for other types of loans. Keep in mind that funding times are also lender-dependent, but are typically completed within 30 to 60 days.

How to take out an SBA Express loan.

If you’re interested in an SBA loan, follow these steps to get one.

1. Determine your borrowing needs: Since SBA Express loans cap out at $500,000, it’s important to figure out how much money you need. If you’d like to borrow more than $500,000, you may have to explore alternative financing solutions.
2. Verify your eligibility: Before you go ahead and apply for an SBA Express loan, make sure you meet all the criteria. Your business must be considered a small business by the SBA and have reasonable owner equity to invest. Plus you’ll need to prove that you’ve already invested financial resources toward the business. In addition, you’ll be required to meet the individual lender’s criteria, which may include a minimum credit score of 650, at least two years in business, and strong annual revenue. 
3. Choose a lender: Not all SBA lenders are created equal. That’s why you should shop around and find the ideal option for your unique situation. You can always use the SBA lender matching tool on the SBA website to help you out.
4. Fill out SBA Form 1919: Once you decide on a lender, complete SBA Form 1919. Be prepared to share information about who owns the business, what you intend to do with the funds, the number of employees you have, and whether you’ve received any SBA loans in the past. Double-check your work to avoid errors and inaccuracies, which may lead to delays with approval and funding. 
5. Submit documentation: Some lenders will ask you to provide certain supporting documents with your application. These may include business credit reports, financial statements, personal and business tax returns, and a business plan.
6. Wait for approval: As stated, the SBA will respond to standard Express loan applications within 36 hours and Export Express loan applications within 24 hours. Once the lender receives the green light from the SBA, it’s up to them to approve your application and distribute the funds. In most cases, however, you’ll be able to close on your loan within 30 to 60 days.

Pros and cons of SBA Express loans.

Like most business financing solutions, SBA Express loans come with benefits and drawbacks you should consider, including: 

Pros

• Fast turnaround times: If you’re in need of an SBA loan with quick approval and funding times, the SBA Express loan may be a good option. Depending on the type of loan you choose, the SBA may approve your application within 24 or 36 hours. This is quite fast when you consider that it typically takes them at least five to 10 business days to approve other types of loans.
• Flexibility with collateral: As long as your loan is less than $25,000, the SBA doesn’t require collateral. If you don’t want to put your personal or business assets on the line, you’re sure to appreciate this type of flexibility. 
• Easier application: Compared to other types of SBA loans, SBA Express loans have simpler applications. It won’t take you as long to apply for them, so you can expedite the process of securing funding.

Cons

• Smaller borrowing amounts: SBA Express loans cap out at $500,000. While this might seem like a lot of money, it might not be sufficient if you have plans to purchase expensive equipment or acquire a business. You might want to consider the traditional SBA 7(a ) program if you need to borrow more money. 
• Must meet certain qualifications: Unfortunately, SBA Express loans aren’t available to just anyone. To take advantage of them, you must meet stringent criteria set forth by the SBA and the lender you choose. 
• Lenders may take a while to distribute funds: Even though the SBA approves SBA Express loan applications quickly, it’s up to the individual lenders to provide funding. Depending on the lender you choose, you may still have to wait weeks or even months for the money.

Bottom line

If you’re in the market for an SBA loan, but want to skip the lengthy application and longer approval times of the traditional SBA 7(a) loan, the SBA Express loan should be on your radar. Before you sign on the dotted line, however, weigh the pros and cons to ensure you’re making the most informed decision. Learn more and apply for SBA loans.

According to the U.S. Small Business Administration (SBA), small businesses account for 99.7% of all businesses in the U.S. But what exactly is a small business? Below, we’ll dive deeper into the SBA’s definition of a small business, so you can determine whether you meet SBA loan requirements and qualify for certain benefits.

SBA small business definition.

The SBA’s definition of a small business varies by industry and is defined either by a business’s average annual receipts or by the number of employees.

The SBA’s set size standards for every industry are sorted by the North American Industry Classification System (NAICS). A NAICS code is a six-digit code number that helps companies explain what they do. 

If you don’t know what your NAICS code is, visit Census.gov/NAICS to explore your options. In the event you can’t find a perfect match, go with the closest option. Keep in mind that your NAICS code should describe the primary activity of your business or the one that produces the most revenue.

Here’s a look at several industries and the maximum average annual receipts (your gross income plus the “cost of goods sold,” based on your federal tax returns) or number of employees (the number of workers you hire each of the pay periods for the preceding completed 12 calendar months) that qualify them as a small business. 

Only one size standard applies per industry.

In addition to maximum average annual receipts and maximum number of employees, the SBA will consider whether your company is headquartered in the U.S. and whether it primarily operates in the U.S. It will also look into whether your company is a for-profit business and whether it’s independently owned and operated.

Do you qualify as a small business?

To find out if the SBA considers your company a small business, follow these steps.

1. Visit the SBA size standards table to locate your industry and NAICS code.
2. Look at the figure under average annual receipts or number of employees.
3. Do some math or research to determine if you meet the threshold for average annual receipts or number of employees. 

You can also go to the SBA size standards tool and plug in your NAICS code. The tool will then ask for your average number of employees or average annual receipts. Based on your answer, it will verify whether you meet the SBA’s criteria for a small business.

Benefits of being a small business.

If the SBA does count your company as a small business, you might be wondering how you can take advantage of this classification. Here are some ideas. 

SBA loans

There are a number of SBA loan programs that offer low rates and longer repayment terms you might not be able to find elsewhere. The 7(a) loan is the SBA’s most popular program and offers up to $5 million in capital for small business owners. Upon approval, you can use this capital to cover a variety of expenses, such as startup expenses, real estate, short- and long-term working capital, and equipment. 

Business development programs.

The SBA has Small Business Development Centers (SBDCs) throughout the U.S. to provide small businesses with counseling, training, and technical assistance. Another organization called SCORE also offers free mentorship and resources. You can utilize these development programs if you qualify as a small business.

Government contracts. 

The SBA works partners with federal agencies to award 23% of prime government contract dollars to qualifying small businesses. If you meet the SBA definition for small business, you can submit bids and take advantage of government contracts, which offer an additional, reliable stream of income. 

Research grants

The Small Business and Innovation Research research grants are designed to encourage small business owners to dive into technology and commercialization opportunities. While this is a highly competitive program, it also offers small businesses the chance to expand your technological investment and potentially profit from commercialization.

Tax incentives

As a small business, you can also save money with tax incentives. The Small Business Health Insurance Tax Credit, for example, gives eligible small business owners the chance to save up to 50% of employee health care costs, if they buy insurance from the Small Business Health Options Program (SHOP). Some cities, like Philadelphia, also award tax credits to entrepreneurs and small business owners.

Bottom line

If you believe you’re a small business owner, there’s a good chance the SBA does, as well. But your average annual receipts and number of employees may position you as a medium sized or larger business instead. That’s why it’s wise to do some research and determine where you stand. If the SBA does consider you as a small business, go ahead and take advantage of everything you can! See if you qualify and apply for an SBA loan.

For business owners and entrepreneurs with a large amount of savings, the main obstacle to starting a business is often coming up with a viable idea. Yet many aspiring entrepreneurs have a different problem—the idea is there, but the capital isn’t.

Startup funding or startup capital is something that every new business needs to get off the ground. As an entrepreneur, however, the challenge is figuring out where to find the startup funding you need to launch your new business. On a positive note, there are many startup funding options available if you know where to look.

How do startups receive funding?

Accessing startup financing can be a struggle. Traditional banks rarely offer business loans to brand-new entrepreneurs. Before lending any funds, many lenders prefer to see a proven financial track record that demonstrates an ability to repay the funds a business loan applicant is seeking. Without that financial history, the lender does not have the foresight to predict whether your venture may be successful enough to make good on your obligation.

These challenges create quite a conundrum for would-be entrepreneurs. How do you get the capital you need to get your startup off the ground when banks are unlikely to approve you for traditional business loans? 

The good news is that there are multiple ways small business owners can find the startup funding they need. Some entrepreneurs find alternative financing options to fund their startups, some turn to investors, and others rely on self-funding to get the job done. Additionally, there are a few out-of-the-box ways to access startup capital available. One of the key ways to succeed as a new business is to find the right combination of startup funding that works for you.

Startup funding stats.

• 54% of SMB ownersstarted their business with personal funds with another 12% relying on friends and family. 
• 79% of SMB owners needed less than $100,000 to start their business with 43% needing less than $10,000.
• The average loan amount for a small business owner is $47,000.*
• A small business has a median of five employees when it is first funded by an outside lender.*
• A small business has been in business for about three years (a median of 40 months) when it is first funded by an outside lender.*

*Based on internal Lendio data of 300,000+ loans funded since 2013.

Types of startup funding.

Below are 11 types of business funding that are available to startups. Read on to discover whether one or several of the following startup funding options might be a good fit for your new business. 

1. Alternative business loans

Small business loans from alternative lenders can be a solid funding resource for new startups. These loans often feature more lenient qualification standards compared with traditional business loans. As a result, alternative business loans may be a better fit for new businesses that are unable to qualify for other types of business financing. 

In addition to less stringent requirements, alternative business loans also feature other benefits such as credit-building potential and faster funding speed. And these small business loans may offer more flexibility when it comes to how you use the money you borrow as well. 

2. SBA startup loan

The Small Business Administration (SBA) is typically known for providing loans to established businesses. However, that doesn’t mean there’s no hope for an entrepreneur who’s trying to get their new business venture off the ground. 

If you are able to meet the SBA’s borrowing requirements, you may be able to qualify for an SBA loan even as a startup. Generally, these loans are available to partially-financed startups. The SBA likes to see the business owner have some “skin in the game” with around 30% of the owner’s own money in the business. The SBA also prefers to work with startups where the owner has some experience in the industry and in management.

It’s also important to note that the SBA itself does not issue loans. Rather, the agency establishes the guidelines for an approved intermediary and guarantees a percentage of the loan (in the case of default) which minimizes the risk to the lending partners. This financing vehicle is available to small businesses when funding is otherwise unavailable on reasonable terms. To learn more about SBA loans for startups, or to see if your business qualifies, check out this helpful SBA loan guide.

3. Microlenders

Entrepreneurs who cannot secure startup funding from other sources may also want to consider working with microlenders. Microlenders are often non-profit organizations that offer loans to small business owners—sometimes including startups—for small amounts. The loan amounts from microlenders can vary, but frequently range from $5,000 to $50,000. 

Some microloans are available to specific categories of small business owners, such as women-owned businesses or minority-owned businesses. But other microloans may be obtainable by entrepreneurs that fit in broader categories. 

The Small Business Administration also offers a microloan through SBA funding intermediaries for up to $50,000. The SBA micro loan option does not require any collateral from the borrower and is available to eligible businesses, including startups. 

4. Business line of credit

Business lines of credit are among the most flexible ways to help fund your startup. These credit lines can provide a business owner with quick capital, which they can use to meet a variety of business needs or resolve a cash flow gap.

When you open a business line of credit, the lender gives you a credit limit which represents the maximum amount you can borrow on the account. You are not required to use any of the funds until you need them, and the lender only charges interest when you access your credit line. 

As you repay the money you borrowed, you also eliminate the interest the lender charges you. At the same time, you regain the ability to borrow against the same credit line again in the future—up to the credit limit—as long as the account remains open and in good standing (and the draw period is active on your account). 

5. Business credit card

A business credit card could be another helpful type of startup funding to consider when you open a new business. Even if your business is brand new, you might qualify for this type of account if you have a good personal credit score. 

There are many ways that a business credit card may benefit your new startup. First, a well-managed business credit card might help you build good business credit for the future, if the card issuer reports the account to one or more of the business credit reporting agencies. And a business credit card can also be valuable for helping you keep personal and business expenses separate. 

You can also use a business credit card to help you manage business cash flow. However, it’s best to pay off your full statement balance each month if possible to avoid paying expensive interest charges on the account. 

Finally, some business credit cards feature valuable rewards or cash back benefits. And while you should never spend extra money to chase rewards, there’s nothing wrong with earning extra perks on purchases that you already need to make for your business anyway. 

6. Crowdfunding

Crowdfunding is another strategy that some entrepreneurs use to generate funding for new startups. Websites like Kickstarter and Indiegogo are examples of helpful tools that can help entrepreneurs raise small amounts of money from a large number of investors. 

In addition to equity crowdfunding (as described above), some small business owners use debt crowdfunding to borrow small amounts of money from numerous lenders. Donor crowdfunding is another option to consider as it allows entrepreneurs to raise donations to support their business goals. 

When the crowdfunding process is successful, it can result in an influx of startup funding to support a small business’ goals. However, results can vary and many entrepreneurs find that crowdfunding campaigns fall short of reaching their funding needs.

7. Venture capital

You may be able to get funding from investors for your startup in the form of venture capital investments. With venture capital, you give up partial ownership in your business in exchange for investments. 

Venture capitalists take on a lot of risk. There’s a chance these investors could lose all of their money if a new business venture doesn’t succeed. As a result, most venture capitalists typically focus on working with companies that display high-growth potential. 

As mentioned, you typically need to be prepared to offer partial ownership in your company in exchange for venture capital investments. You might also have to agree to allow investors to play an active management role as well, or at least have a seat on the board of directors. By taking a more active role in the startups in which they invest, venture capitalists often aim to improve their chances of success. 

8. Startup accelerators

A startup accelerator is a small business mentoring program that has the goal of accelerating the growth of your new business venture. Typically, you must apply to be accepted into a startup accelerator, and you’ll need more than a good business idea to qualify. Many startup accelerators require startups to have an actual product (or at least a prototype) ready to produce and promote. 

If a startup accelerator program approves your application, it will typically require you to sign over a percentage of equity in your company (often 5% to 10%) to secure a spot in the training program. Should the accelerator help you find other investors, you may have to surrender additional equity to secure more startup capital in the future.  

9. Small business grants

Small business grants represent another unique and appealing way for startups to seek funding. Unlike business loans and other types of financing, you do not have to repay grants, nor does this type of funding feature the added expense of interest or fees. 

On the other hand, competition tends to be high for small business grants. Therefore, you should be prepared to conduct research and often submit numerous grant applications if you hope to use this strategy to fund your new business venture. 

Even if you apply for dozens of grants, there’s no guarantee that you’ll receive the funding you seek. But it doesn’t hurt to try as long as the process doesn’t become so time-consuming that it keeps you from completing other important tasks in your startup business journey.

10. Personal savings and credit

Many small business owners rely on personal savings or personal credit to fund their startup business ventures. The SCORE Foundation (powered by the SBA) says that 78% of startups receive capital from personal savings or income from another job. MasterCard® research also shows that 46% of small businesses use personal credit cards. 

It’s important to understand that using personal funds or credit to invest in your own startup carries significant risks. For example, some entrepreneurs might withdraw funds from savings or retirement accounts to launch a new business venture. Yet before you consider taking such a big risk, it’s important to consider what would happen if the new business failed and make sure that possibility is something you could survive. 

11. Family and friends

Some small business owners have the privilege of being able to turn to family and friends for support of their new business ventures. And whether your loved one wants to get involved as an investor, a lender, or a donor, receiving a helping hand from someone close to you can mean the world when you’re working hard to turn your business dreams into reality. 

According to NorthOne, around 10% of small business owners used funds from friends or family in 2021. Yet before you accept loans, investments, or donations from loved ones, it’s important to consider the potential hidden cost. 

Even the best-made business plans do not always succeed. If your startup fails and you’re unable to repay your loved one (or if their investment turns into a bad one), that loan or investment could become a financial loss for your friend or family member and damage important relationships. So, before you accept any startup funding from loved ones, it’s important to put all of the loan or investment terms in writing and have an honest conversation about the risks involved.

Next steps

There are many different ways to get startup capital for your business without a traditional bank loan. So take the time to review your options and figure out which ones work the best for you. If you decide to borrow money for your startup, it’s also wise to compare multiple financing options to make sure you find the best deals available for your situation. 

As a responsible business owner, it’s also important to understand how much financial assistance you need and can afford to repay. Before you apply for any financing you should have a plan in place to pay back the money you borrow without putting yourself or your new business under financial strain.

For many people, the American Dream is to take a great idea and turn it into a thriving business. Yet it’s rare that a great idea alone will convince an investor or lender to take a chance on you. Before a lender in particular will approve your application for a business loan, you typically need to prove that you and your business are good credit risks. 

Some borrowers may have trouble satisfying the qualification requirements of traditional commercial lenders—especially startups and small business owners with less-than-perfect credit. This inability to access financing could be a key factor that drove 61% of small business owners to rely on personal funds to address financial challenges in their companies in 2021 (based on a Federal Reserve report). 

If you find yourself in a similar situation where you need business capital, but traditional financing doesn’t make sense, peer-to-peer (P2P) lending could be worth considering. Here’s what you need to know about how this alternative business loan solution works. You’ll also learn whether P2P loans are safe and how to determine if they are the right fit for your small business. 

What is peer-to-peer lending?

Peer-to-peer lending is a method of borrowing money that allows you (aka the borrower) to access funds from multiple investors (aka peers), rather than a single lender or financial institution. Due to this unique borrowing structure, P2P lending is sometimes called person-to-person lending or social lending, as well.

P2P lending platforms utilize technology to bring different investors together to fund an individual loan. Some P2P platforms may even allow lenders to compete with one another to make loans—sometimes (though not always) resulting in more attractive interest rates and loan terms for borrowers than they might receive elsewhere. In other scenarios, borrowers may be able to qualify for financing that they might not otherwise have qualified to receive.

How does peer-to-peer lending work?

Peer-to-peer lending marketplaces use fintech (aka financial technology) to match would-be investors with would-be borrowers who are seeking various types of loans. It’s important to understand that P2P platforms are not lenders themselves. However, the online platform can help perform the following tasks:

• Collect and process a loan application from the prospective borrower 
• Facilitate a credit history and credit score check 
• Share your potential loan offer (including APR and fees) if you’re eligible for financing
• Move your loan to the funding stage, if you accept the offer
• Share your loan listing with investors to see if any are interested in funding it
• Service funded loans, process monthly payments, and divide payments among investors
• Contract with third-party debt collectors to collect defaulted debts

Is peer-to-peer lending safe?

The U.S. Small Business Administration (SBA) notes that peer-to-peer loans could be a practical alternative financing solution for small businesses. Yet the agency cautions that there are both benefits and drawbacks to consider before a business decides to move forward. 

As a borrower, one of the first details you should understand about a P2P loan is the cost. In addition to the interest that the investors charge on your business loan, the P2P platform may charge supplemental fees. (Investors may pay fees to the P2P platform, as well.) Of course, any type of financing comes at a cost, but it’s always wise to do the math, so you know what you’re agreeing to pay for a business loan up front. 

For investors, it’s important to know that P2P investments are not FDIC-insured. Therefore, you may face an added degree of risk with this type of investment compared with other options. At the same time, if the process goes smoothly, you might enjoy higher returns than you’d receive from FDIC-insured CDs or savings accounts. It’s up to you to determine your risk tolerance and how much of your portfolio you’re comfortable exposing to higher-risk investments.

Is a peer-to-peer loan right for you?

If you’re wondering whether a peer-to-peer loan could work for your business, there are a few details you’ll want to consider. First, it’s wise to review your credit reports and scores (from all three credit bureaus, if possible). 

A lender will likely review one of your consumer credit reports and scores when you apply for a P2P loan. Therefore, it’s helpful to know the condition of your credit before you apply for financing. You can access a free credit report from Equifax, TransUnion, and Experian via AnnualCreditReport.com once every 12 months. Through the end of 2023, you can take advantage of free weekly credit report access through the same website. 

Next, make sure you’re in a position to afford a new business loan. If you believe your company might struggle to afford a new monthly loan payment, now may not be the time to seek new financing. 

Finally, shop around and compare P2P loan offers from multiple companies. You may also want to consider other types of small business loans. Comparing different financing offers can help you make sure you find the best deal available for your company.