Financing Options for Small Businesses

Most community banks are big proponents of small businesses, so this is a great place to start. Establish a relationship first by opening business checking and savings accounts. Then apply for a line of credit, which is a pre-approved loan you can tap when you need it. 

If you plan to purchase a building or equipment, you should be able to get a loan by using the asset as collateral. Business expansion loans are also a possibility—you may be able to borrow against your accounts receivable or other contracts with guaranteed income. 

Beyond community banks, there are many online lending agencies, banks, credit unions, and community development financial institutions (CDFIs) where you can apply for a loan. 

To apply, you will likely need a good personal credit rating and either a strong business plan or audited financial statements to show the financial condition of your business. 

Investors such as angel investors or venture capitalists can provide cash in exchange for either a debt or equity position in your business. Obtaining financing this way is a big decision since you are no longer the sole owner of the company if you give away some of your equity. 

Another option is bringing a partner into your business. Typically, the partner will provide cash, as well as management or other complementary skills, and play an active role in running the business with you. 

There are many government programs to help with small business financing this year due to the pandemic. The Small Business Administration consistently has loans and programs available to small businesses. This year, they are also managing the forgivable Paycheck Protection Program (PPP) loans, economic disaster funding, shuttered venue operator loans, and restaurant relief grants, to name a few. You might also want to see what’s available in your county, city, and community governments. 

Finally, organizations like the Small Business Development Council (SBDC) can provide space, funds, and training to small businesses in their area.

Your business may also benefit from nonprofits and educational institutions that provide grants, scholarships, and other funding opportunities to businesses and business owners in certain categories. For example, your local chamber of commerce may have programs and funding options available for local businesses. 

Factoring is an option for businesses with accounts receivable balances. A cash advance can be made with the accounts receivable balances as collateral. This type of loan is common in the retail fashion industry where items are ordered months in advance of being sold, which causes a cash flow gap. 

Crowdfunding has been made popular by platforms like Kickstarter. A business can apply on these platforms for funding, and individuals can make contributions. Sometimes the business will promise goods or services in exchange for funding. 

It’s common for owners to put startup expenses on their personal credit cards and use cash advances. This is one of the most expensive ways to fund a business and should be used as a last resort.

All financing options come with fine print. Terms and interest rates vary significantly. Sometimes you come to a cliff, where you have to pay everything back all at once. Be sure to carefully read any agreements you sign and run them by a lawyer if you don’t understand them. Your personal financial situation could suffer greatly if you aren’t careful. 

For example, businesses that got a PPP loan and later received a buyout offer may not be able to sell because the loan agreement prohibits them from doing so. If they didn’t read the fine print and sold their company, they are now personally liable for paying back PPP loan proceeds. 

If you have questions or want to discuss financing options, please feel free to contact us any time.