The US Small Business Administration (SBA), defines a “small business” as those companies that see less than $750,000 in revenues and hires less than 250 employees. With this earning level requirement, most small business owners might assume there won’t be any financing options available for them to leverage. We’re here to change their minds.
If you need financing to start your own entrepreneurial dream, read further on today’s small business finance sources. Do your homework today, and then you will find the best option that will bring your business to life.
Small Business Finance Options
There are many options for financing your small business in the market today. These options range from private to public or government loans. Take a look here at both sources:
Private Bank Loan
You’ll find a private loan at either a credit union, bank, or any other lending institution. A private loan is commonly used for financing product development, equipment, or buildings. A private loan must be repaid before a specific date. Examples of these types of private bank loans used today include the following:
1. Equipment Loan
Sometimes a bank offers an equipment loan program to assist small businesses to buy the equipment they’ll need to deliver or manufacture their products. Equipment loans are secured against the machinery that’s eventually acquired.
A lender can take the equipment back if borrowers don’t pay back their loans. Both lenders and borrowers sign a loan agreement that outlines this rule and what equipment is bought.
2. Business Lines of Credit
These kinds of funding tools allow banks to finance specific amounts for a small business, with the understanding that the business owner will pay back the full balance before their following billing cycle begins.
If the business owner can’t pay back these amounts, then they pay interest and service fees on any outstanding balances. Business lines of credit are a good way for small companies to build their business credit history.
Public or Government Loan
Government-backed loans don’t directly lend money to small businesses. Instead, they create policies for micro-lenders to negotiate with potential borrowers. The government ensures these loans, which then reduces the risk to lenders.
The Small Business Administration (SBA) loan is a popular government-guaranteed loan available in today’s market. The SBA is a federal governmental agency that works with pre-approved lenders to offer funding assistance to small companies.
There are different types of SBA loans that small companies can apply for to expand their operations. Some of these small business loans include:
3. 7(a) Loan Program
7(a) loans are usually $2 million per loan borrower. The SBA will guarantee a 7(a) loan for no more than 75 percent of the full loan amount or $1.5 million.
This small business loan is a great way for a small company to cover their start-up costs. Eligible costs include anything from employee uniforms to a delivery vehicle.
4. CDC/504 Loan Program
CDC stands for Certified Development Company. A CDC or 504 loan is a long-term loan that helps those small companies that contribute to their community’s economic development. A CDC/504 loan is a long-term loan with a fixed rate, to purchase items such as equipment or real estate.
Most CDC/504 loans amount to $5 million. The SBA will guarantee a CDC/504 loan for roughly 40 percent of the loan amount. A commercial lender funds the rest. These SBA loans carry10- or 20-year maturity periods.
5. Microloan Program
A microloan provides financing for small business owners to borrow small, or “micro-level” amounts to pay for their everyday business expenses. A microloan usually amounts to$13,000 per borrower. The most that a small company can apply for with a microloan is $350,000.
SBA Loan Criteria
SBA loan eligibility requirements will differ based on the loan product you apply for. Most of the criteria for qualifying for a business loan that applies to all SBA loan types include:
- Businesses operating within the US;
- Businesses that meet the SBA’s definition of a “small business” within its industry;
- Businesses that demonstrate that the owner/s contributed their own funds and time to the company;
- Businesses that are a for-profit entity;
- Businesses that can show three to five-year financial revenue projections;
- Businesses that can secure the loan with either collateral or other assets;
- Businesses that show a positive debt service coverage ratio; and
- Businesses that demonstrate that the owners have an excellent personal credit history (FICO of 650 or more.)
More Small Business Funding Sources
Other ideas for financing your small business that don’t fall within the private or public lender categories can include these sources:
6. Merchant Cash Advances
A merchant cash advance provides even more flexible funding for those companies that show consistent point of sale (POS) or credit card sales.
A lender sends a borrower funds in exchange for a percentage of the borrower’s regular debit or credit card transactions. These lenders may charge fees or request short-term repayment schedules for their service.
Merchant cash advances aren’t the same as a loan. A small business owner won’t have a repayment schedule nor pay for monthly fees. Merchant cash advance lenders usually receive between five and 15 percent from every transaction until the advanced amount is paid off.
7. Crowdfunding
A crowdfunding platform can help a small enterprise raise funding by tapping family members, private investors or friends, to invest funds. Crowdfunding provides a small business owner a site online to highlight their company’s products and request for funding.
Crowdfunding comes in three different categories. These categories are called, equity-based funding, rewards-based funding, or donation-based funding.
Equity-based crowdfunding entitles donors to become co-owners of the company. Donation-based crowdfunding doesn’t provide a financial return to a contributor for their “donations.” A rewards-based crowdfunding effort offers investors either products or services as a means to rewarding their investments.
What’s Your Next Step?
Are you still unsure about the many small business finance options available today? If you are, then head over to the US Small Business Administration website today. Your first step is to confirm that your company meets the definition of a “small business.”
You can also head over to our website and check out this helpful guide on SBA loans. At SBALenders.com, we can help entrepreneurs find the capital they need to fund their businesses. Let us help you make your entrepreneurial dreams a reality.