The SBA Paycheck Protection Program (PPP) was a lifesaver for thousands of businesses. But what now? Most merchants that obtained PPP loans have since used the funds and had the loans forgiven. But many businesses need financial support as much now as ever. Where can you turn today for help? What business loans and financing are available? Here we'll dive deep into the best options for small business financing today.
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Small business landscape
The SBA Paycheck Protection Program (PPP) was a unique and historic loan program. In very little time, the government enacted a law to help get hundreds of billions of dollars in the hands of small businesses.
Unlike any loan programs that came before, the PPP program didn't require you to show profitability, or have employees (contractors were eligible!), or be in business many years or even show how you'd repay the debt. The loans were - amazingly - designed to be forgiven and not repaid. They were, for most businesses, a much needed grant amidst one of the most difficult economic backdrops in history: the COVID-19 pandemic.
Now, two years later, though the total spread of COVID is not finished, much of US economic life has returned to something closer to normal. However, for many businesses that word 'closer' means business is not back to the way it was.
For many small business owners, a recent rise in inflation means either increasing prices or taking a hit to profits. The Producer Price Index, which measures wholesale prices for goods and services, jumped nearly 10% last year, according to the U.S. Bureau of Labor Statistics.
In fact, three in five small business owners have had to raise prices in the past year, according to the Small Business Index. Some have taken out loans, deferred purchases or decreased staff to manage higher costs brought on by inflation.
Supply chain disruptions
As if inflation wasn't difficult enough, the supply chain disruptions that have plagued small businesses since the pandemic began don’t seem to be going away anytime soon.
A whopping 69% of owners believe those issues have negatively affected their bottom line, according to a Goldman Sachs survey. Most respondents also believe suppliers are favoring large businesses over small businesses due to the larger volume of their orders.
Though there definitely are challenges, many business owners remain optimistic. In fact, despite the past turmoil and potential obstacles ahead, 77% of small business owners are optimistic about the future of their business, according to the latest Small Business Index report.
That high a positive result can be attributed to the confidence of entrepreneurs generally, plus the recent habits of innovative problem solving shown during the small business boom that began during the pandemic.
In fact, during the ongoing pandemic in 2021, nearly 5.4 million new business applications were filed - a new record, according to figures from the Census Bureau. That’s up from 4.3 million in 2020.
Small business loans and financing landscape
In some ways, the small business loans and financing landscape is unchanged in the last few years. In other ways, the world of small business borrowing is wildly different than the years before the pandemic. Most of the changes are for the better and to the advantage of businesses.
Small business lending - what is the same?
Some of the common elements of small business lending remain unchanged. Banks are still making loans, and SBA loans are still a very big part of the lending landscape (more on SBA loans in a minute). Interest rates are rising for SBA loans, since most are tied to the Prime rate which continues to rise as the Fed raises rates. Even so, conventional and SBA lending remains strong.
The most fundamental aspects of qualifying for financing also still remain. For traditional loans, you need to have decent personal and/or business credit and make a profit or have a great business plan showing how you're soon to make a profit.
As with lending historically, still today, the better your personal and business credit profile, the more options you will have and the better rates and costs you'll be offered.
Small business lending - what's changed?
While elements of lending remain consistent, the pandemic has brought about a number of changes to the small business lending landscape.
In just two years, we saw 5-8 years of technological advancement in the financial services industry, including in companies offering loans for small businesses.
During the pandemic, both bank and non-bank lenders were forced to quickly innovate in order to use technology to help manage applications and handle the processing and underwriting of those applications.
In just two years, we saw perhaps 5+ years of technological advancement in the financial services industry, including in companies offering loans for small businesses. One thing this means for owners is the availability of online applications and purely online interactions with many lenders.
Another change with the technological advances is the availability of credit to a wider range of small businesses. Lenders have increased their use of automated underwriting models - that is, how they review and qualify businesses - and many have been able to "widen the credit box', meaning expand on the range of business profiles they can approve.
Today, more than before, there are loan options for borrowers with poor credit but sound businesses. Similarly, there are more loans available for borrowers with decent credit but who have a start-up without business history.
Finally, with the advances in technology, many lenders that historically had a smaller footprint - lending in just a handful of states - now offer loans throughout the country. This is similarly true for some intermediaries, or loan brokers, who can now provide valuable services nationally instead of only in certain states.
Small business loans and financing: your top 8 options
There are almost as many small business loans and financing options as there are reasons to apply for the money! When owners think of business financing, they often assume all options are loans coming from a brick-and-mortar bank. This is not true at all.
Today, hundreds of alternative loan lenders offer a little more leniency and flexibility around eligibility, qualifications, and the pay-back process than brick-and-mortar banks. Sometimes the increased flexibility carries a higher financing cost, but this isn’t always true. Many of these non-bank lenders simply use sophisticated scoring and underwriting models, powered by technology as mentioned above, to make faster and sometimes more generous decisions.
Besides traditional bank loans, you have lots of solid financing options, including: merchant cash advances, lines of credit, equipment financing, invoice financing and more.
Besides traditional bank loans, you have lots of solid financing options, including: merchant cash advances, lines of credit, equipment financing, invoice financing and more.
Within the wide net of small business financing options, here are the top 8 options you might consider:
1. Term loans
A term loan is a loan that’s repaid over a set time frame with interest. You can use term loans to meet short term expenses or fund longer-term investments in your business.
Term loans may or may not require collateral and can have fixed or variable interest rates. Repayment terms can be as short as three months or stretch up to five or even up to ten years.
A short-term loan - one with payback period under two years - may be a good financing option if you have a cash flow gap you need to fill quickly — such as new hiring to fill contracts, or settling an outstanding invoice with a vendor. Short-term term loans make sense when you’ll be able to repay it in one to two years.
A long-term loan, on the other hand, might be a more appropriate type of funding when you need to borrow a larger amount or need more time to repay. These are also usually best for refinancing existing debt.
2. Equipment financing
As the name suggests, equipment financing refers to loans that help owners buy equipment. However, these loans are more flexible than you might think. Equipment financing can be used for the purchase of not only traditional industrial equipment and machinery, but also for furniture, vehicles, appliances, technology and point-of-sale systems.
Here’s how they work: an equipment financing lender gives you the funds to buy it, or pays the vendors directly for it, and then you pay the lender back the loan plus interest in monthly increments.
Some equipment financing companies will also let you take out a loan against your paid-off equipment to fund small projects within your business. This is known as a sale leaseback, and sale leasebacks tend to have very low interest rates and attractive repayment terms compared to other sources of funding.
With equipment financing, the equipment typically serves as collateral for the loan. A great benefit is that often you can borrow up to 100% of the cost. Usually, with equipment financing, you own the equipment from day one, but the lender will file a UCC filing against the equipment. Once the full amount of the loan has been paid back plus interest, the lien is released.
3. Working capital or ‘alternative’ loans
Working capital loans, also sometimes called ‘alternative loans’, are a flexible financing option for business owners who are able to quickly repay a loan. These loans are usually aimed at short-term needs, such as paying suppliers or vendors, meeting payroll or starting a project you think will bring in new revenue soon.
Depending on the lender, you may be able to borrow up to $500,000 in working capital, and these loans may carry higher interest rates or fees compared to other loan options.
Lenders offering working capital or alternative business loans typically have access to more sophisticated technology than brick-and-mortar banks to determine whether a candidate is qualified. This allows them to make faster decisions, and often more lenient decisions about who to approve.
For example, where a “brick-and-mortar” bank may look for a business to have been operating for 2+ years and require the owner to have a great credit score, lenders offering working capital loans often accept newer businesses and base approvals on your recent performance, rather than emphasizing your personal credit score.
Working capital, or alternative, loans may also offer methods of repayment that flex with your daily sales. Rather than requiring you to make one fixed monthly or daily payment for the duration of your loan, alternative loans may offer daily payments as a fixed percentage of your credit card sales, so that payments ebb and flow with your business’s sales, making it easier for you to keep up with payments when sales fluctuate constantly.
4. Business lines of credit
A business line of credit could be a good business financing option if you have changing capital needs to meet at various times. Instead of a lump sum of funding, a line of credit is a revolving line that you can draw against over time as long as you have available credit. As you pay down the amount borrowed, you free up room to borrow again.
A small business line of credit is sometimes the most flexible financing option for businesses. You can use the line as needed, and you only pay interest on the portion of your credit line you’re using. It’s similar to a business credit card in terms of how it works, but a line of credit may offer a lower interest rate and higher limit.
What are the drawbacks to a small business line of credit? You may pay an administrative fee to draw against your line of credit or keep it open. Also, a business line of credit may only be good for a set time period. If that’s the case, after the time period expires, your line of credit may be closed and you’ll have to apply for a new one to continue using it.
5. Small Business Administration (SBA) loans
The Small Business Administration (SBA) backs loans that are made by banks and non-bank lenders. Loans are available for both new and established businesses. Microloans, which top out at $50,000, exist for startups or businesses with small capital needs.
SBA 7(a) loans can offer up to $5 million for working capital, inventory, equipment, renovations and more, while the CDC/SBA 504 program can provide businesses with up to $5 million in capital to purchase, construct, or renovate commercial real estate.
There is good and bad with these SBA loans for businesses. The good: they have the best rates and longest terms of any of the loans mentioned here. The bad, they are tough to qualify for, very document-intensive and take longer than any other form of financing.
These loans usually have a rate set as Prime rate plus an added margin from 1.00%-3.75%, and the terms can be as long as 7 or even 10 years. Unfortunately, most SBA loans typically take from one month to a few months to provide funding. Also, these loans require a significant amount of paperwork, including tax returns, business financial statements, personal financial statements and many SBA forms.
For this type of small business loan, you’ll need to offer collateral if any is available, along with a personal guarantee. So, lenders will want a lien on any real estate, including your home, plus any equipment you own. Also, you’ll need to meet minimum credit score requirements which are typically from 650 to 700 minimum depending on the lender.
Finally, for most of these loans, you have to be able to show a profit for your business, both in recent years and for the year to date. This can be particularly difficult for some small businesses impacted by the COVID-19 pandemic and recent troubling trends in hiring, payroll costs and supply chain issues.
6. Merchant cash advances
A merchant cash advance is a way to borrow against your business’ future debit and credit card receipts. It’s a convenient form of financing for most small businesses that have a steady flow of credit and debit card sales.
Merchant cash advances are a flexible business financing option in that you can generally borrow between 50 percent and 200 percent of your business’s average monthly credit card sales. The payback for merchant cash advances is relatively simple: payments are deducted from your credit and debit card sales daily or weekly. Terms typically range from six months to as long as 24 months.
It’s possible to get funding in one or two business days, and these advances may provide you with more spending power than a loan or line of credit. That convenience may come with a higher price, however.
Merchant cash advances use a factor rate, rather than an annual percentage rate, to determine loan costs. Depending on how much you borrow, the factor rate, and your time frame for repaying the advance, the effective APR could end up being much higher than what you may pay for other borrowing options.
Typically, whether a merchant cash advance is for you and your business comes down to the use of funds. If you will use the funds for something that will translate into near-term revenue, and you can pay back the advance within 9 to 18 months, then it makes sense to consider this.
For example, if an advance lets you quickly hire more staff, or start a new revenue stream, or expand your services, or even payoff high interest short-term debt, those could be great reasons to consider a cash advance since those could translate into an increase in revenue or decrease in outflows quickly offsetting the higher cost of the financing.
7. Commercial real estate loan (CRE)
Business owners can tap into commercial real estate (CRE) loans to either buy a property or to access the cash available to you in a property you own. If you’re interested in buying the property you operate in, this is a very common type of loan made to small businesses.
This financing often comes from SBA financing, but there are many non-SBA lenders that can also offer commercial real estate loans. To qualify for an SBA loan for your commercial real estate, your business will have to occupy over 50% of the usable square feet within the property.
If you already own your property, and you have equity available (equity is the value of the property above what you owe), you can borrow against the property in a number of ways and for a variety of purposes.
One option is to refinance the existing debt on the property, and in doing so possibly reduce your monthly payment and thereby lower your monthly expenses. Alternatively, you might refinance the debt and at the same time increase the loan size to get cash-out for your business.
A cash-out refinance can be used to improve the building, parking lots, exterior space or even provide working capital for operations. If you are doing construction or making improvements, some lenders, particularly those offering SBA loans, may allow you to include soft costs such as architectural and legal fees, appraisals and other construction costs.
Another option is a second mortgage, allowing you to leave your existing mortgage untouched. This is often an option with SBA loans. Lenders can make an SBA 7(a) loan for your business, for example, providing working capital for many reasons, and your property will provide collateral for the loan. One issue with these is to be sure the current first mortgage lender will allow you to have a second lien on your property.
When considering a commercial real estate loan, there are some things to keep in mind. First, most lenders will be laser-focused on your business’s financial health. You will have to be able to show financial statements and tax returns showing that your business makes enough profit to cover the monthly payments.
Also, these loans are not fast to obtain. Most commercial real estate loans will take anywhere from 2-3 months to close. Finally, since real estate loans are generally large loans with longer terms (20 to 30 years), they will impact your cash flow for a very long time.
8. Invoice financing
Invoice financing, also called accounts receivable financing or A/R financing, is a method of securing funding by using your unpaid invoices as collateral for a loan. (For more details, see What is Accounts Receivable Financing.) The lender reviews the invoices and your business’s past collection history to determine how much it can lend. As the invoices are paid, the business will pay back the lender.
Invoice financing can be used by companies of all sizes as an alternative to securing a typical business loan. Usually, other types of loans discussed above, many with fixed payments, are the better option for a business making a significant purchase or funding a large project. However, invoice financing can be a smart solution for the temporary cash flow challenges most small businesses face from time to time.
In addition to solving cash flow issues, invoice financing has other benefits. Compared to other types of loans, it will have fewer approval requirements. Invoice financing will typically not require additional collateral or you as the business owner to have a good credit score. This type of financing is also much faster to obtain than traditional loans.
How to prepare to get funding for your business
Now that you’ve got a better idea of the small business financing options available to new and existing business owners and how they work, let’s take a look at how to prepare to apply for getting these various loans.
There are several factors that can influence business loan approval decisions. As you consider how to get funding for your business, it’s important to keep in mind some of the things lenders look for. Depending on the type of loan, these can include:
The business operating history
Your revenues and profitability
Your time in business
Your personal credit scores
The business credit profile
Any available collateral
The Business Operating History
For a lender to review your operating history, you'll want to get your financial statements in order, including a cash flow statement and profit and loss statement. These help lenders gauge your ability to repay a loan.
If you have a newer business, review your business plan to make sure you’ve outlined a clear plan for becoming profitable and being able to pay back a loan. Some types of loans, however, such as merchant cash advances and equipment loans, won’t require much detail about the operating history.
Your Revenues and Profitability
For some types of loans, such as some lines of credit and merchant cash advances, lenders will focus on your business’s revenues (that is, your sales before expenses) above all else. For this, they will want to see the last 3 or 4 months of business bank statements. It’s best if you can show flat or upward revenue trends, and ideally you have no or only a small number of overdrafts or days with negative balances.
Your Time in Business
Some lenders will require 1 or 2 years in business, while other types of financing lenders are fine lending to start-ups or early stage businesses. In particular, equipment financing is possible for brand new businesses, while SBA loans require usually 2+ years in business.
Your Personal Credit Scores
Almost any type of loan or financing will require a review your personal credit, so before applying for business loans, try to review your personal credit record. Even if a loan does not require a personal guarantee, almost all lenders will review your personal credit to see your payment history and any challenges reported there.
Some lenders will require excellent personal credit - such as SBA lenders - but others will be ok with scores in the 500 to 600 range. If you are in the 400’s or low 500’s, you might benefit from working with a credit counselor for a couple of months before putting in applications. A good credit counseling advisor can help raise most scores pretty quickly.
The Business Credit Profile
If possible, also get a feel for your business credit record. Three major credit bureaus maintain business credit reports, and you can contact them to see your record. Those three are:
If your business does not yet have a credit record, a new business loan could be a good opportunity to start building credit. You might also consider obtaining a business credit card quickly to start building a positive credit profile for your business.
Any Available Collateral
Whether you need to have collateral totally depends on the type of financing you are getting. Smaller SBA loans, for example, do not require collateral, while for larger SBA loans - typically those over $350,000 - one of the requirements is that lenders attempts to fully secure the loan with business or personal collateral.
For equipment loans, the collateral is the equipment being purchased. Typically these loans require no further collateral. In the case of many lines of credit and working capital loans, no collateral is required or expected. Finally, for commercial real estate loan, the collateral is the property being financed or being used to guarantee the loan.
How to find business loan options
As you start seeking your business financing or loan, one important question is how do you find the various types of financing? With the advances in technology, and the evolution of the lending industry, finding the right loan can be a bit of a challenge.
A Huge Number of Lenders
There are currently hundreds of lenders in the marketplace, and even thousands when you include SBA lenders. This presents some benefits and some challenges.
On the one hand, the diversity of lenders means there is a wide variety of loan types available to a wide variety of business types and owners. There are lenders who offer low-rate financing to those with great credit, and lenders that offer loans at higher cost to those with poor credit.
Some lenders offer very small business loans, while others offer financing into the millions. And of course, there are lenders offering all of the types of financing discussed above.
This huge array of options also presents challenges. How are you as a small business owner expected to know who makes which type of loans to which type of businesses and owners? And how do you know which companies to trust?
Seek a Financing Broker You Can Trust
One option is for you to apply with your bank directly. This can be a good option if you have a great relationship with your bank, your credit is strong, your business financials are in shape and you want the kind of loan they offer. The last point is the critical one - most banks only have one or two types of loans, and that’s all they will offer if you are approved.
Another option is to apply separately to a number of lenders. This was once more realistic than it is now. Back when you had access to a smaller number of banks in your locality, this was a more possible approach. Now, however, with the internet and the growth in the number of non-bank lenders, this isn’t reasonable for most owners.
There are thousands of lenders, and the lending landscape is constantly changing. For even someone doing it full time, it is very difficult to keep up with the types of loans, their terms, their benefits and drawbacks, their processes and their guidelines.
A financing broker, or loan broker, is someone who is an expert at all of the ins and outs of small business financing and can help you navigate this complex and confusing financing world. When selecting a financing broker, try to focus on a few key questions. Is it a company that has been around for awhile, and do they have testimonials or public feedback about their work? Also, can you see who the owner is or who the key executives are?
Many brokers are small firms, so at least be sure you can see who the owner is and find her or him on LinkedIn. Any loan broker who tries to stay anonymous or isn’t publicly visible should be avoided.
A financing broker, or loan broker, is someone who is an expert at all of the ins and outs of small business financing and can help you navigate this complex and confusing financing world.
How to evaluate small business loan options
If you are working with a loan broker, they can help you understand and compare your options. It can be difficult to make an apples-to-apples comparison when you’re considering different loan products with very different structures, but generally, you’ll want to review and consider things like:
How quickly can you get your money?
Evaluate the total repayments
Compare the term of the loans
Compare the benefits of fixed vs. variable rates
Find out if collateral is needed
How quickly can you get your money?
The important questions here are how quickly do you need the money, and how quickly can you get your money. Before you choose one financing option over another, it’s important to think about how long it will take until the capital is available to be put toward the project you have in mind. Ask about the anticipated timeline that you can expect to be approved and to be funded, and also ask yourself how long you can wait for the money?
Evaluate the total repayments
There are many different types of cost structures that lenders use and there are equally as many factors to consider when determining total cost, including total payback amount, APR, upfront fees, compounding interest or other penalties, and more.
There is a common misconception that annual percentage rates (APR) and interest rates are the same thing. APR is a calculation that looks at all interest, fees, and the timing of those fees on equal ground. APR is expressed as a percentage and represents the yearly cost of borrowing funds. While APR is helpful in comparing funding options, it isn’t the end all be all.
Another factor used to assess the cost of a loan is the absolute dollars you will pay back for the funding you receive (inclusive of application costs, interest, late fees, origination fees, etc.). Sometimes this amount - the total amount to be repaid - is an easy and helpful total to give you a feel for the cost of the money in absolute terms.
By calculating the absolute dollar amount you will pay back and comparing it to your other offers, you can determine which funding option works best for your budget and cash flows. Also, some small business loans allow for early payoff at a lower cost, so it is important to pay close attention to any such options that are part of the offer.
Compare the term of the loans
Another key item to evaluate and consider is the repayment term, assuming there is one for the financing option you select. The repayment term will dictate the size of your regular payments, plus it will indicate the amount of time you have to pay back the amount of funding you receive.
The term is important for a number of reasons, but most importantly, it indicates the amount of time your business cash flow will be impacted by making the payments. For a short-term loan or cash advance, the payback period might be as short as 6 to 12 months. This could hamper cash flow during that period, but you know it will be a short time frame to payback.
Other types of financing, such as equipment loans and SBA loans, might allow for a long payback of 3 to 7 years, but you will be obligating yourself to those payments for a very long time. Sometimes you may not feel you have the visibility to the future of your business to be comfortable with the longer term options.
Compare the benefits of fixed rates vs. variable rates
If approved for a loan, yes you’ll be paying back the loan amount, but you’ll be responsible for paying back the amount borrowed plus interest or a fixed interest cost. The interest rate or factor rate (fixed cost) may be based on a variety of potential factors like your sales history, personal credit score, the time you’ve been in business, any existing debt your business has, and more.
Interest rates can either be fixed rate – meaning they do not fluctuate during the life of the loan – or variable rate – meaning the interest rate can fluctuate throughout the life of the loan based on economic conditions. When comparing financing options that have an interest rate, you’ll want to consider whether fixed rate or variable rate interest payments are more affordable for you.
Find out if collateral is needed
Sometimes, in exchange for the money the loan is providing, banks and non-bank lenders will require you to offer up a valuable item – like your business property, your business equipment, your personal house – as collateral that they would then own should you default on your payments.
It’s important to note that some lenders will require you to offer up collateral that is the property of the business – like the funds in the business's account, or your actual brick and mortar location (if you own it) - while other lenders may require personal assets (your house, your car, etc.) This is most common for loans that require a personal guarantee.
Offering up personal collateral can be very stressful, knowing that should you default on your payments, you may lose something meaningful and valuable to you, so it’s important to weigh out the benefits and risks before you sign on the dotted line of loans that require personal collateral.
Wrap-up: final tips on small business loans and financing in 2022
Owning a small business is a dream for many people. Yet, the day-to-day costs of opening and running a business can make owners think twice about owning or running one.
Regardless of whether you have years of experience in a given industry, or you're embarking on a totally new type of business, small business loans or financing can be one way to help bring your business vision to life.