Small-business financing has come a long way in recent years. While banks have become more relaxed with their lending requirements, online lenders have brought stiff competition with their streamlined application processing and fast loan approvals. Beyond the more widely known debt-based financing options in Small-Business Financing 101, there are additional funding opportunities for those seeking to make their first -- or next -- small-business purchase. 

No longer do business owners and entrepreneurs need to rely on their personal bank account or mortgage their house in order to fund a new venture. With looser bank lending requirements and online lenders becoming more mainstream, even the most hesitant can achieve the dream of business ownership.

Beyond traditional bank financing, the following options should be considered for funding a business venture:

SBA acquisition loans.

As discussed in our previous look at financing, the Small Business Administration (SBA) loan program offers financing guaranteed by the U.S. government, and is typically offered with lower interest rates and longer repayment terms. The SBA has been offering these loans in one form or another since its establishment in 1953, so even those early in their buying journey are likely to be at least tangentially familiar. 

However, modifications to the program at the beginning of this year have made these loans far more accessible. For one, the SBA slashed equity requirements for acquisition loans. Buyers are now able to lean on banks to finance up to 90 percent of acquisition deals of $500,000 or more, down from 20 percent previously. Additional changes include an extension of the seller standby rule through the life of the loan -- meaning seller debt cannot be considered part of equity unless it is on full standby -- and a new directory that lists franchises eligible for SBA assistance, a resource that was previous unavailable. 

Peer-to-peer lenders.

Companies such as LendingClub and Prosper are among the first peer-to-peer lenders to emerge in the U.S., and are lowering the barriers to entry for prospective business buyers. Unlike legacy lending models, online peer-to-peer lending allows borrowers to obtain a loan, while investors purchase notes backed by payments on that loan. The peer-to-peer model offers a variety of options that are attractive to a diverse set of buyer needs, including: 

  • Term loans, which enable businesses to borrow and repay over a period of three to five years, with interest, to finance specific purchases like new equipment or business relocation. 
  • Personal loans, which are lump-sum loans used for nearly any purpose, including the upfront cost of buying a business. Typically, these are repaid over three to five years, with interest. 
  • Lines of credit, which give businesses the flexibility to borrow capital as needed for unexpected expenses or large, lump-sum purchases. This type of loan acts much like a credit card, except borrowers only pay interest on the amount spent. 

401(k) business financing. 

Companies such as Guidant Financial and Benetrends are among the leading service providers of 401(k) business financing. Also referred to as Rollovers for Business Startups (ROBS), this form of financing allows you to use funds from your existing retirement account to buy or start a small business. Since a ROBS is not an actual loan, the buyer does not incur any monthly payments or accrued interest. 

Obtaining 401(k) business financing is fairly simple. First, someone would contact a service provider, such as Guidant or Benetrends to set up the ROBS structure. Next, a C corporation would be set up, which will be used to sponsor a 401(k) plan -- one that allows participants in the plan to acquire employer stock in a private business, as well as roll over funds from existing retirement accounts. Once the funds from an existing retirement account are rolled over into the C corporation's retirement plan, the plan then purchases stock in the corporation through QES transaction. The funds are now available as cash that can be used to operate a business.

There are many advantages to 401(k) business financing. Since the money comes from your individual retirement account, you are able to start your business venture debt-free without any loan interest to pay. No collateral is needed and there are no tax penalties for early withdrawal. It's also quick and easy. You can receive funding in as little as 10 days.

Eligibility for 401(k) financing includes: 

  • Corporate sponsorship, as the 401(k) must be backed by a C corp. 
  • A rollable retirement account with at least $50,000 in rollable funds. 

Crowdfunding and angel investors.

Crowdfunding and angel investors are two more concepts that are likely familiar to most prospective buyers, but continued changes and growth in each of these investment options deserve a fresh look. 

Kickstarter and Indiegogo are the models that come to mind for most when the concept of crowdfunding is introduced. However, states are increasingly paving the way for equity crowdfunding, a concept with a key differentiator from the likes of online crowdfunding sites. The model allows those that invest in a business to receive actual equity in the new venture, while allowing the buyer to legally raise up to $1 million within a 12-month period. This allows proprietors to forgo any obligations of debt and simplifies accounting because all money raised is aggregated as a single investment. 

A successful crowdfunding campaign can also generate free local publicity and connect businesses with customers who have supported them from day one. When executed properly, equity crowdfunding can help proprietors accelerate small-business growth and expand market research. There are limitations and regulation, however. For example, if a company wants to raise more than $500,000, it is legally required to disclose all information regarding its operations and may need to provide audited financial statements. 

For those looking for a more traditional route, angel investors are becoming more accessible than ever. According to the 2018 American Angel study, U.S. angel investors give as much as $24 billion to as many as 64,000 entrepreneurs, small businesses and startups annually. Prospective buyers may doubt their ability to access this influx of cash -- after all, the stereotype pegs angel investors as tech billionaires and giant firms planted firmly on the west coast. However, according to the report, 63 percent of angel investors are based outside Silicon Valley, which should be welcome news to a hopeful small-business owner looking for a face-to-face meeting. 

Today's small-business market offers opportunities for both buyers and sellers.

According to a recent BizBuySell report, small-business sales for 2018 are set to surpass last year's record-high of 9,919 transactions. As an increasing number of Baby Boomers retire and exit their businesses, buyers benefit from a strong selection of financially healthy established businesses. At the same time, sellers benefit from a steady stream of buying activity.

Given the new developments in business financing, rule modifications and exciting new sources of capital, owners and entrepreneurs can more easily take advantage of acquisition or growth opportunities. With a clear understanding of their needs and abilities, proprietors can successfully identify whether debt or equity financing is the best option for their business' financial success.