In 2021, the Small Business Administration delivered almost $45 billion1 in funding to qualified businesses. These small business loans and other types of business financing are critical to the initial and continued success of many companies.
Business financing provides funding that can be used for many purposes, from buying equipment and developing new products to freeing up cash flow and expanding into new territories. There are two main categories of financing available to small business owners:
- Debt financing: A business owner borrows money from a creditor then pays it back over time with interest.
- Equity financing: A business owner receives money from an investor in exchange for partial ownership of the business.
Although there are benefits and risks to both debt and equity financing, more businesses choose to borrow money rather than give up equity and full control of their business.
Before you dive headfirst into loan applications, it’s important to do your due diligence. Determine whether you are a good candidate for financing, compare the terms of different financing options, then find a lender you trust when you are ready to begin the application processes.
Factors That Impact Your Business Financing Options
Lenders are understandably risk-averse. They want to feel comfortable that the money you borrow will be repaid with interest. To mitigate their risk, lenders will look at several factors to help them determine whether you and your business are a safe investment.
Credit Score/Credit History
How you have handled debt in the past is a good indication of how you will handle it in the future. A low credit score or a shaky credit history may disqualify you from traditional financing options.
Active Loan Applications
Resist the temptation to apply for multiple loans so you can cherry-pick the best offer. Too many hard credit inquiries in a short time span is a red flag to credit bureaus and can hurt your credit score. (See above.)
Available Cash Flow
Insufficient cash flow is a major red flag for lenders. Your ability to repay your loan is dependent on you having cash available. Without it, your application is likely to be rejected.
Time in Business
The longer your company has been in business, the better your chances of obtaining financing. Businesses less than two years old may need to provide collateral or proof of viability, such as outstanding invoices or purchase orders.
Documented Business Plan
Lenders want to see that you have a solid plan for your business. Preparing a comprehensive business plan that includes an overview of your company, market outlook, and financials will improve your chance of approval.
The Most Popular Types of Small Business Financing
There are a lot of business financing options out there, and they definitely aren’t one-size-fits-all. Your business’s needs are unique, so factors like loan amount, repayment terms, and how fast you can have the money in hand can help you decide which option is right for you.
Traditional Bank Loans
Bank loans generally offer low interest rates and attractive repayment terms, but they are harder to qualify for than other options.
Loan amounts: $250,000+
Repayment terms: 1-20 years
Turnaround time: 2-4 months
Credit criteria: Strong personal and/or business credit scores
Small Business Administration (SBA) Loans
SBA loans are processed through lenders, but because they are guaranteed by the SBA, they are easier to qualify for than traditional bank loans.
Loan amounts: $2,000-$5 million
Repayment terms: 5-25 years
Turnaround time: 30 days-6 months
Credit criteria: Minimum business credit score
Online lenders are often less strict about qualifying borrowers, but you will pay a higher percentage rate for high-risk loans.
Loan amounts: $25,000-$500,000
Repayment terms: 1-5 years
Turnaround time: 2-7 days
Credit criteria: Varies
SBA microloans may be available through designated nonprofit community-based organizations to provide small loans to startups and entrepreneurs with imperfect credit.
Loan amounts: $500-$50,000
Repayment terms: 1-5 years
Turnaround time: 1-3+ months
Credit criteria: Important
Business Credit Cards
Business credit cards are fairly easy to get and, with the right card, you can even earn cash back when you pay off the balance each month.
Loan amounts: $250-$25,000
Repayment terms: 30 days
Turnaround time: 1-3 weeks
Credit criteria: Strong personal credit score
Merchant Cash Advance
Merchant cash advances deliver fast access to capital, but, in return, the borrower will pay back up to 80 percent more than with a traditional business loan.
Loan amounts: $200-$250,000
Repayment terms: 3-12 months
Turnaround time: 1-7 days
Credit criteria: Not required
This short-term financing option lets you receive goods from a vendor and delay payment for a designated period of time.
Loan amounts: $1,000-$100,000
Repayment terms: 10-120 days
Turnaround time: Hours to weeks
Credit criteria: Good business credit
Other Types of Business Financing
If poor credit or other factors prevent you from qualifying for a business loan, there are other options available.
Small Business Grants
This “free” money doesn’t have to be paid back, but there is a lot of competition for a small bucket of funds.
A startup with an exciting business model may start a crowdfunding campaign to raise funds online through people who want to see the business succeed.
These investors see the value in your product or service and are willing to help fund it, but in exchange, they want equity and some control over the business.
Venture Capital (VC)
VC firms invest large amounts of cash in startups that are likely to make a lot of money. Like angel investors, VCs want equity in the business and some level of control.
Why a Community Bank Is a Great Resource for Small Business Financing
As a small business owner, it’s good to know what financing options are available when you decide to improve or expand your business. Finding the right lender is an important step in the process, as not all banks provide the same level of service.
A community bank, like First State Community Bank, is a great resource for small business financing. With roots in the community, local banks can provide personalized service and customized lending solutions because they have firsthand knowledge of the local market.
In addition to offering several small business loan options, First State Community Bank can help you with a variety of additional business financing needs, including:
- Real estate purchases and refinancing
- Commercial lines of credit
- Commercial term loans
- Accounts receivable financing
- USDA loans
- Government loans and leasing
- Agricultural lending
The Right Business Financing Can Set You Up for Success
Whether you want to replace out-of-date software or open a storefront in the next state, the right business financing can help you achieve your goals.
But before you get started, it’s important to identify and address issues that might slow or derail the approval process, such as bad credit, insufficient cash flow, and no business plan.
There is no single best option when it comes to small business financing; there are always pros and cons. However, when you have the full picture of the types of financing that are available, it’s easier to pinpoint the best fit for your specific needs.
To find out why First State Community Bank is the Right Bank for Small Business, contact us and one of our experienced local lenders will be in touch.