By Neil Hare
Certain SBA loans are designed to be more flexible than typical term loans.
On June 12, the Fed announced it would keep interest rates in the 5.25% to 5.5% range, forcing small and medium-sized businesses to raise capital at the highest interest rates in decades, ultimately making it more difficult and costly for them to raise capital.
Of course, just because it's harder to raise capital doesn't mean you won't need it to run your business, grow, and address cash flow issues. So how do you navigate this environment?
How to get financing with a business loan
First of all, as we learned during the pandemic, you need to get your business's financials in order before you can apply for any kind of loan or look for equity investment. Most lenders will ask for two years' worth of tax returns, profit and loss statements, and cash flow statements, so start there. That means investing in solid bookkeeping, an experienced accountant or accounting software, and legal advice if necessary. There's free help with managing your finances from your local Chamber of Commerce, SCORE chapters that offer free mentoring, the Small Business Development Center (ASBDC), and the Women's Business Center (AWBC).
As always, we recommend building a strong relationship with your bank first. Once you open your business checking account, make sure to build a personal relationship with the bank's small business manager. Their job is to ensure that you receive the best service and tools you need. Local or regional banks often have better customer service, but national banks also offer excellent service. Make sure to meet with the manager in person over coffee or lunch to build a relationship.
Unfortunately, even if your financial situation is stable and you have a good relationship with your bank, it can be hard to get a line of credit or a fixed-term loan, especially if you're a relatively new business. You may not have a two-year revenue track record or collateral (equipment that can be used to secure a loan). Or maybe you've had a poor year or two of performance. Banks are skeptical of any downward trend when interest rates are high.
Jimmy Olefson, president and CEO of National Capital Bank, a regional lender in Washington, D.C., acknowledges that the Fed's decision will make borrowing harder for the time being. “The Fed's decision to keep interest rates unchanged will continue to make it harder for small businesses to borrow,” he said. “Given how quickly the Fed raised rates and the lag time it takes for a rate hike to actually have an impact on the economy, I think we're still in the early stages of the impact of the Fed's decision.”
Non-bank lending options for funding
SBA
Luckily, if you have trouble with your bank or need to raise more money than your bank will approve, you still have additional options for financing. The first place you should look is the Small Business Administration (SBA).
First, on June 7, 2024, the SBA announced a new 7(a) Working Capital Program (WCP), which allows 7(a) lenders, with the assistance of the SBA, to offer a new structured line of credit designed to provide more flexibility than typical term loans. This pilot program is an expansion of an existing loan program, allowing businesses to fund individual projects or orders and access capital earlier in the sales cycle. Additionally, small businesses can collateralize their assets to access this capital, reduce the cost of the loan by shortening the maturity, and pay an annual upfront guarantee fee.
While this new program is attractive, existing SBA loans remain one of the cheapest forms of capital on the market. The 7(a) loan program itself can be used for real estate, working capital, refinancing business debt, purchasing machinery, equipment, and furniture, and more. The maximum amount for a 7(a) loan is $5 million, which is more than enough for most small businesses.
For longer-term, fixed-rate financing, the SBA also offers 504 loans. These loans are available for up to $5.5 million and are available through Certified Development Companies (CDCs), the SBA's community-based partners that regulate nonprofits and promote economic development. 504 loans can be used to purchase or construct buildings or new facilities, buy machinery and equipment, and make improvements to real estate or existing facilities.
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Government Subsidies
Although the days of Paycheck Protection Program (PPP) grant money are over, the federal government still offers a number of grant options in addition to SBA loans. Here are a few examples:
In addition to these federal grants, state and local governments and businesses also offer grants and free technical assistance.
Crowdfunding
The latest innovation in small business lending is crowdfunding on fintech platforms. Crowdfunding is a modern take on the old-fashioned plan of raising money from friends and family in the form of a loan or equity in your business. Investment from friends and family is still popular, but technology now makes it possible to find investors outside of your own zip code.
“Small businesses will have to prepare for higher costs of capital, but there are plenty of great non-bank options, including responsible fintechs and other community-based lenders. There are multiple groups working to fill the gaps in the market,” said Jacob Haar, co-founder and managing partner at Community Investment Management (CIM), which provides debt capital to underserved small businesses by funding responsible fintech lenders. “Small businesses will have to prepare for higher costs of capital, but there are plenty of great non-bank options, including responsible fintechs and other community-based lenders. There are multiple groups working to fill the gaps in the market,” Haar added.
Fintechs that offer crowdfunding include SMBX, Honeycomb Credit, Wefunder, Kiva, and SeedInvest (recently acquired by StartEngine). All of these platforms connect small businesses with investors who then access small loans that the platform collects on the business's behalf. The business then repays the investors through the platform, usually in principal plus interest, and charges a service fee.
As with any loan product, be sure to read the fine print on the fintech offer. In some cases, interest rates may be high and fees may be charged. In a high interest rate environment, paying more becomes the cost of doing business, but you should still be very aware of what you're paying and look for the lowest interest rates possible.
Find the funding you need
The economy is undoubtedly in a precarious position. Inflation, supply chain issues, workforce challenges, and rapidly changing technology all continue to put a strain on small businesses. But the good news is that funding is available if you know where to look. So, once again, get your finances in order and then cast your net wide.
About the Author
Neil Hare is a solicitor at the firm. Dentons Law Firmthe world's largest global law firm. Neal specializes in small business policy and has run small business outreach campaigns for leading organizations such as Visa, MasterCard, the U.S. Chamber of Commerce and the U.S. Department of Commerce. Neal is the author of two novels. Animals crying and Hell's Kitchen GodFollow him LinkedIn.
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