In this article:
- 1. Small Business Administration (SBA) Loans
- 2. Small Business Line of Credit
- 3. Online Lenders
- 4. Invoice Financing
- 5. Merchant Cash Advance
- 6. Equipment Financing
- 7. Business Credit Cards
- 8. Family and Friends
- What to Consider When Seeking Emergency Financing
- Sources of Small Business Emergency Financing
- Should You Finance a Business Emergency With Personal Funds?
- Finding the Right Emergency Financing
For the most up-to-date information on emergency small business loans available for those affected by the COVID-19 pandemic, see this article on PPP loans.
Every small business needs a financial boost from time to time—and for many entrepreneurs, now is definitely one of those times. When you need emergency cash quickly, where can you turn? Traditional installment loans from banks often require lengthy application processes and may take months to be approved and funded. Fortunately, they're not your only alternative.
Here's a rundown of the best emergency financing options for small business owners.
1. Small Business Administration (SBA) Loans
If your business has been affected by COVID-19, start by investigating what benefits or relief you may be eligible for through the Coronavirus Aid, Relief and Economic Security (CARES) Act. This emergency stimulus package includes SBA-guaranteed loans that can help you pay employees, access emergency cash and get six months of debt relief on qualifying loans. The initial phase of the program quickly ran out of funds, but on April 24, the president signed a bill appropriating over $320 billion for Paycheck Protection Program (PPP) loans, with about $60 billion of that set aside for small businesses, as well as $60 billion for the SBA disaster relief fund.
If you already have a relationship with an SBA lender, you may be eligible for the SBA Express Bridge Loan, which provides up to $25,000 with the expectation the money will be repaid from an Economic Injury Disaster Loan (EIDL).
Pros: PPP loans may be eligible for forgiveness if used for approved purposes and if employees are kept on payroll. Emergency Economic Injury Grants of up to $10,000 do not have to be repaid. Both EIDL and Express Bridge loans promise fast turnaround.
Cons: High demand means the program may quickly run out of money again; if you don't have an existing relationship with an SBA lender, it may be difficult to get approved.
2. Small Business Line of Credit
While most small business financing comes in the form of installment credit, a business line of credit is a type of revolving credit. As with a credit card, you are given a credit limit and can draw funds up to that amount. You don't have to make payments until you actually draw on the funds; as you pay back the money, it becomes available to borrow again. A business line of credit can be a good emergency tool for companies that regularly need working capital, such as seasonal businesses with predictable downtimes or companies that need to buy materials or inventory long before they can sell it.
Pros: Flexibility; you don't have to pay it back until you use it. You can draw from the line of credit repeatedly without reapplying for more.
Cons: Interest rates are usually higher than on bank loans; smaller limits than bank loans.
3. Online Lenders
With their sometimes lengthy approval processes and stringent criteria, traditional bank loans don't work for many small businesses that need cash quickly. Many banks are reluctant to write small loans, so unless you're seeking hundreds of thousands of dollars, a bank may not fit your needs. Online lenders fill the gap by offering smaller loan amounts, easy application processes and looser approval requirements. You can usually apply for these loans online, get approved right away and have the money in your bank account in a day if you are approved—sometimes faster.
Pros: Quick access to cash; simple approval process; good fit for smaller loans.
Cons: Smaller loans and higher interest rates than traditional bank loans.
4. Invoice Financing
Does your business frequently invoice customers for work done or products delivered, but wait 60, 90 or 120 days to get paid? Large corporate or government customers often pay slowly, which can create a cash crunch for your business. Invoice financing could be the answer. Here's how it works: You sell your outstanding invoices to a financing company in return for a percentage of their face value, typically 80% to 95%. When the full invoice is collected, you'll get the rest of its value, minus the financing company's fee.
Invoice factoring companies and invoice financing companies both offer this service. The difference is that a factoring company takes over collecting your invoices, which might cause confusion or make customers worry that your business is in financial trouble. A financing company lets you continue collecting on the invoices yourself, so customers never know you've used the service.
Pros: Quick access to cash; ability to borrow against money you're already owed.
Cons: High interest rates; if a factoring company contacts your customers, customers may think your business is in trouble.
5. Merchant Cash Advance
Companies such as restaurants and retailers that collect most of their payments via credit or debit cards may find a merchant cash advance a quick source of emergency financing.
Merchant cash advance companies lend you money against your projected future credit or debit card payments from your customers. They then take a percentage of your credit or debit card payments, either daily or weekly, to pay themselves back.
Pros: Quick approval; rapid access to funds.
Cons: Very high interest rates; daily or weekly repayment can drain cash flow; if your future sales are uncertain, you may not be approved.
6. Equipment Financing
If a key piece of equipment has worn out and needs to be replaced, or a sudden demand requires more equipment to keep pace, equipment financing can help. You can find companies that specialize in equipment financing; many business equipment vendors or manufacturers also have their own financing programs.
Pros: Can spread the cost of necessary equipment over time; the equipment itself serves as collateral.
Cons: If you can't repay the loan, the lender will repossess the equipment.
7. Business Credit Cards
You probably already have a business credit card in your wallet. If you don't, appealing business credit card offers are easy to find. A business credit card that offers a 0% introductory APR for six months, 12 months or longer can be used to pay for inventory, supplies, equipment or business services without racking up interest. Try to avoid using business credit cards for cash advances, however; the cash advance APR is generally much higher than that for purchases.
Pros: Easy approval process; flexible payment options; potential for 0% introductory APR.
Cons: High standard interest rates, especially if used for cash advances.
8. Family and Friends
Sometimes the people who know and trust you are the best source of emergency business capital. However, there are two things to keep in mind before you approach your loved ones. First, borrow only from people who can afford to lose the money if you can't pay it back (not from your retired aunt who's on a fixed income). Second, treat the transaction as you would any business loan. Write up a loan document, pay interest and set a schedule for making regular loan payments.
Pros: Can be easy to get.
Cons: Failure to pay the loan back could hurt your relationship.
What to Consider When Seeking Emergency Financing
No matter what type of emergency financing you decide to apply for, here are some factors to keep in mind.
- Know exactly what you want. How much money do you need? What will you use it for (for example, buying three new delivery trucks)? How will the money measurably benefit your business (for example, doubling production capacity)? How much time do you need to repay the loan? Answering these questions will help you determine the best source of financing and increase your chances of getting approved. Create financial projections to assess the financial impact of the loan and your ability to repay it.
- Match the source of capital to your need. Generally, emergency financing is for short-term needs, which shouldn't be financed with a long-term loan. Look for short-term loans, which generally have terms of 24 months or less.
- Give lenders what they want to see. Even lenders with streamlined approval processes will ask for certain basic information, such as your years in business and your annual sales. They will also consider your business credit score and, in some cases, your personal credit score. From now through May 15, 2020, Experian is offering companies a free business credit report so you can see where you stand before applying for financing.
Sources of Small Business Emergency Financing
Your current business bank is the first place you should look when seeking emergency financing. They know you and understand your business, which may speed up the approval process. But don't stop there: Shop around and compare different lenders to find the best possible terms.
SCORE and your local Small Business Development Center are two valuable resources to help you identify the best financing options. You can also visit online business loan marketplaces to search for the type of financing you need and get matched with lenders. Popular loan marketplaces include:
There are also online lenders that directly finance your business. Here are some of the most popular to consider:
Should You Finance a Business Emergency With Personal Funds?
In your search for fast business financing, it can be tempting to turn to a personal loan, home equity line of credit or personal credit card for quick cash. But mingling personal and business funds is usually a mistake. At best, it could lead to problems at tax time by blurring the line between personal and business income and expenses. At worst, it can put your personal credit score—or even your home—on the line if you can't repay the loan.
Finding the Right Emergency Financing
When your business is short of cash and you need quick financing to tide you over, it's easy to panic. But don't jump at the first emergency financing source you find. Think carefully about how much money you need and why, be prepared with the information lenders want, and research multiple options to find the best financing terms.
Small businesses have more alternatives than ever before for emergency financing. By doing some research and weighing the pros and cons of each option, you'll be able to find the perfect financing source for your business.