The US Small Business Administration (SBA), recently reported that there are more than 30 million small business companies operating in America today. Small businesses created more than 60 percent of all new jobs formed last year. The good news is that there are innovative small business funding sources to help these companies make their enterprise dreams come true.
Are you one of these 30 million small businesses looking for funding as well? If you are, then this article is for you! Check out this helpful guide to get an overview of these small business loans and fast financing tools that can take your business to the next level.
What’s a Small Business?
“Small businesses” are defined as independently owned companies that have limited amounts of employees and annual revenue, depending on their industry niche. Most small business companies are either corporations or partnerships.
The SBA defines “small business” as one that has less than 250 employees. “Small businesses” also generates less than $750,000 in annual earnings.
“Small business” designations vary based on what industry a company is working in. You can find a list of small business designations in the US Census Bureau industry code. This code includes the criteria a company should meet to fit a “small business” definition within their chosen industry.
Different Types of Small Business Funding
There are many different funding mechanisms for small business financing. These tools include bank or government loans, cash advances or other alternative lending models. Here is a deeper dive into just a few.
Private Bank Loans
These loans are ideal funding for business equipment, buildings, and product development. Once a small business is approved, they can make regular payments with interest. These loans must be paid off over an agreed upon amount of time.
Some specific examples of private bank loans include:
Equipment purchasing represents some of the biggest costs a business will ever spend. Without any startup funds, it’s not likely that smaller companies will be able to buy these high priced pieces of equipment they need to deliver their services. With an equipment loan program, banks help businesses buy the various pieces of equipment they need to deliver their services.
These equipment loans are secured against the actual equipment purchased. This means that if the borrower can’t repay the loan, the lender can reclaim the equipment. The lender and borrower will sign a loan contract that specifies which equipment to buy.
Business Line of Credit
With a business line of credit, your bank assesses your credit history and agrees to fund you with a certain credit limit. If you draw down these funds, you must repay the full balance before the next billing cycle ends. If you don’t, the remaining balance incurs interest and other service fees.
Government-backed loans don’t directly loan money to small companies. Instead, they develop policies and advisories for micro-lenders to negotiate with a small business. The government ensures that the loan will be repaid which can reduce any risks to these lenders.
The most popular government-backed loan are SBA loans. The SBA cooperates with pre-approved lenders to provide financing opportunities for small enterprises. There are several types of SBA loans that small companies can apply to grow their business. Some of these loans include:
7(a) Loan Program
The SBA 7(a) loan program is a great way to pay for many business start-up costs. These costs might include purchasing delivery vehicles or uniforms. Some small companies leverage a 7(a) loan to create a revolving fund that they can draw from for intermittent costs throughout the fiscal year.
A 7(a) loan can be awarded up to $2 million per small business enterprise. The SBA guarantees 7(a) loans for roughly 75 percent or up to $1.5 million.
CDC/504 Loan Program
The Certified Development Company (CDC) or 504 loan program is a long-term loan that helps small businesses contribute to a community’s economic development. The CDC/504 loan offers long term, fixed rate loans for major investments in real estate or machinery. Small companies can also apply for 504 loans to buy or renovate a building.
SBA 504 loan awards are around $5 million or less. The SBA will guarantee a 504 loan for no more than 40 percent, with the commercial lenders funding the remaining amount. SBA 504 loans have around a 10 to 20 year maturity period.
Microloan programs are customized financing tools that enable smaller businesses to borrow small, “micro-level” amounts to cover everyday business costs. The maximum microloan amount an individual company can apply for is $350,999. Microloans are topped at $350,000 per individual company.
Non-profit organizations are also sometimes eligible for microloans. Food banks, for example, can apply for microloans to help with their start-up costs. Microloan average amounts are usually around $13,000.
SBA loan criteria will differ based on which loan you apply for. SBA loan criteria may also differ between micro-lenders. Some basic requirements that apply to all of them include:
- A business that’s recorded as a for-profit entity;
- A business that matches one of the SBA’s small business definitions within their industry;
- A business that is located in and operates inside the US;
- A business that has been in operation for an adequate amount of time;
- A business that presents their three to five-year financial projections;
- A business that demonstrates an acceptable debt service coverage ratio;
- A business that demonstrates that they have assets or other collateral to use as security to qualify for a loan;
- A business that shows profitability and strong revenues;
- The company owner has contributed their own money and time to the business; and
- The company owner has a personal credit FICO score of over 650.
Commercial Bridge Loans
Commercial bridge loans provide a short-term financing “bridge” while you wait for permanent, long-term financing. Small enterprises use these loans while they concentrate on finding longer-term business funding sources. Bridge loans have higher fees and can be closed within 30 days.
Lenders will review specific items in a small company’s financial portfolio to determine if they qualify for a bridge loan. Some factors they review include looking at the company’s operating income and net worth. They will also evaluate your business’ financial statements and debt service coverage ratio.
Merchant Cash Advance
Merchant cash advances are payments to a business in exchange for a portion of their expected future credit or debit card sales. Merchant cash advance terms will include short-term payment time frames (i.e., payments made at the end of each day for 24 months). This flexible business funding tool is a great resource for those companies that have a regular credit card or point of sale (POS) transactions.
Merchant Cash Advances are not loans. Small companies don’t pay monthly fees or strict repayment schedules. Lenders usually receive between 5 and 15 percent of every sale until the total agreed upon advance amount is paid back.
Crowdfunding is a way to raise capital through the collective efforts of your family, friends, or individual investors. A crowdfunding platform gives entrepreneurs a single site to showcase a single, low-cost company project and request funding. You’ll set a goal for how much money you want to raise and your contacts can use the site to pledge their money.
There are 3 different types of crowdfunding. These types include donation-based, equity-based and rewards-based funding.
Donation-based crowdfunding initiatives provide no financial return to contributors. Equity-based crowdfunding lets donors become co-owners of a business. Rewards-based crowdfunding gives investors either a service or product as a way to “reward” them for their investment.
Small Business Grants
Small business grants provide small amounts of startup money to small businesses for specific agreed-upon items between the government lender and business owner. Unlike commercial bank loans, small business grants do not have to be repaid. But the grant recipients have to demonstrate how the funds will be used to achieve pre-defined goals.
There are 20 different small business grant categories that small businesses can apply for. These categories range from alternative energy to agriculture. Government agencies award these grants to those small companies that promote their long range, economic development goals for their constituents.
Feel like you’re ready to capitalize on some of these small business funding sources? The good news is you can start today! Check the US Census Bureau industry code to see if your company qualifies as a “small business.”
Try visiting the Grants.gov website managed by the US federal Health and Human Services agency. Check to see if your small business fits one of their categories for a small business grant. Who doesn’t love free money?
If you’re looking for immediate assistance while you pursue long-term funding, consider a commercial bridge loan. Organize your company’s portfolio. You may find that this short-term fix is right for you.
Don’t forget to check our website for more helpful advice on how to get a business loan. We’re here to connect you with the best resources to help you reach your future faster. Let us partner with you!