March 2018

Next up in the “How It Works” series let’s take a look at how SBA loans work

Every business is unique.

What works for one may not work for another. With a range of choices, each with its own unique requirements and mechanisms, how do you identify which type of financing is best for your business and your needs at this time? You should start with the basics with a full understanding of your situation. You need to be clear about what you want/need versus what your business can take on. Whether you want capital immediately, or sometime later in a lump sum, or phased over time, take stock of your situation and needs first and then consider your financing options.

Let’s take a look at one of the most frequently used business financing options available to small businesses:

How SBA Loans Work – Small Business Loans through SBA

Government-backed Small Business Administration (SBA) extends aid to all small businesses via loans that help them to not just start up a business but to also sustain and grow that business. While the agency itself does not provide financing, it makes affordable loans available through SBA approved lenders like banks. These loans are designed to meet very specific business purposes, so it is important to understand each of these options before applying for an SBA loan. Though cheaper, you may find it difficult to qualify for these loans. Many individuals are disqualified due to insufficient collateral, low credit scores or falling within an unqualified category.

SBA loan programs are designed to meet major financial requirements of varied small businesses. These include microloans, real estate loans, equipment loans, and basic loans under the 7(a) program. You can use the loans provided through the 7(a) program for a variety of purposes – setting up a new business, acquiring a business, purchasing equipment and machinery, or as an influx in working capital, among others

How SBA Loans Work – Eligibility

The general small business loans from the 7(a) program are the most popular among all SBA loans. Since these loans are guaranteed by federal agencies, lenders can offer businesses very lucrative and flexible terms for these loans. It is no secret that the 7(a) loans through the SBA are by far the best way for any small business to get financing if they are able to qualify.

To be eligible for 7(a) loans a business must be for-profit; operate within the United States; show a business need for the funds, and – most importantly – show proof that you’ve exhausted all other avenues and financial resources before applying. This means, you will need to have used your own personal assets, reached out to family and friends, and be able to show that you applied for and had been declined by a traditional lender. It’s no wonder, then, that most small businesses find these loans out of their reach. In fact, a 2016 Forbes report points out that, “The head of the U.S. Small Business Administration has cited industry estimates that 80 percent of small business loan applications are rejected.”

How SBA Loans Work – What you should know

Lowest cost option for small businesses looking for financing to start up or grow a business.
Offered by traditional and alternative lenders and backed by government guarantee.
Multiple types of loans and grants depending on business type and need.
Businesses applying for a loan must first use other resources including personal assets.
Personal guarantee required by business owners or top management of the company.
Long application and funding process compared to alternate financing options.

SBA loans may be a good option when:

Working capital is needed to expand the business over the next few years.
Consolidating loans from multiple lenders.
Hiring new employees or opening a new location.
Recovering from declared disasters.
Your business is impacted by NAFTA.

SBA loans may not be an option when:

Working capital is needed immediately for a very short term.
Consolidating loans will require the company to take a loss.
Business owner cannot provide a personal guarantee.

Besides the general 7(a) loans, the SBA provides 7(a) loans to cover special situations like companies conducting business in underserved communities and companies looking to expand export activities. There are also microloans up to $50,000, and special programs to help businesses recover from declared disasters. To learn more about SBA loans visit their website right here. Many traditional and alternative lenders also help businesses navigate through the process of applying for these loans.

Want to learn more about your options? Here are the pros and cons of the revenue-based financing.

Are you looking for small business loan and alternative financing options?

This is by far the most frequently used option for small business financing. Revenue-based financing allows small businesses to take financing against their continued business success. The oldest form of revenue-based financing is the popular Merchant Cash Advance (MCA). This option truly aligns the interests of both parties. That’s because the financing partner only gets paid if the small business continues to be viable and successful.

It is no wonder then that merchant cash advances continue to see a healthy increase

A 2016 report on Merchant Cash Advance/Small Business Financing Industry byBryant Park Capitalnotes that, “the volume of merchant cash advances provided to U.S. SMEs has steadily increased over the last couple years, projected to reach $15.3 billion in 2017, up from an estimated $8.6 billion in 2014.”

Not surprising, considering quick upfront capital can make a huge difference to any small business. Typically, revenue-based financing provides a lump sum of cash to a small business. This is with the understanding that it will dip into a fixed percentage of the future sales. It’s a great option for any small business owner who is looking at short-term financing (between 6-18 months), cash flow and working capital.

A few years back, merchant cash advances were limited to those businesses that received customer payments via credit or debit cards – like bars, nail salons, restaurants, retailers, and other forms of B2C companies. But now, with advancements in the system, merchant cash advances can work for almost any type of small business.

While merchant cash advances give your business that financial backup, it’s also important to know that it directly impacts your daily/weekly cash flow. Good lenders ensure that the funds they advance to merchants ensure healthy growth in the business even when daily/weekly remittances are being taken from the business’s revenue stream. Uninformed merchants can easily fall prey to unscrupulous lenders who can overburden a business’s cash flow. Therefore, small businesses applying for a merchant cash advance should first make an objective analysis of whether this service is best suited for their business.

What you should know about revenue-based financing

Quick access and faster approval of the application.

Much lower credit score requirement compared to a traditional loan.

Qualification does not require secure assets.

A fraction of the company’s daily/weekly sales goes toward its outstanding financing amount.

Supports payments to be processed against both credit card and cash payments (ACH).

Instead of fixed monthly payments regardless of the business performance, the remittances are tied to the success of the business.

Flexibility of daily/weekly payments with the ability to true-up payments against the actual performance of your business provides peace of mind and extra cushion when times are lean.

There is an immediate impact on your business cash flow.

Revenue-based financing may be a good option when:

The small business will not meet SBA loan requirements.

There is an immediate need for funding.

The company does not have enough collateral for traditional long-term loans.

Revenue-based financing may not be an option when:

The funds will provide only temporary reprieve but cause irreparable harm to cash flow.

The business already has a number of outstanding loans or advances.

Your credit score is below 550. In this case, alternate options like Factoring may be more appropriate.

It’s important to remember that unlike other traditional loan options, which are usually backed by a collateral or federal guarantee, this financing type presents a great risk to the alternative lender. That is why it is a more expensive financing option compared to traditional loans. Businesses should therefore thoughtfully consider when this option makes sense for them and carefully vet the alternative lender.

How Do Small Business Administration (SBA) Loans Work?

How Do Small Business Administration (SBA) Loans Work?

Next up in the “How It Works” series let’s take a look at how SBA loans work