By Neil Hare
The old business saying that the best time to fix a roof is when the sun is shining has never been more applicable than right now. Many businesses have witnessed an increase in activity in recent months. However, with the Delta version still, a threat and flu season officially started, another surge in Covid cases might be on the way. Because this will almost certainly result in additional government limitations, now may be a good moment to secure the business capital you’ve been looking for, as well as consider debt financing options for your company.
Throughout the pandemic, you most likely found a way to keep your business afloat by pivoting, innovating, or utilizing government assistance programs like the Paycheck Safety Program (PPP), the Financial Damage Catastrophe Loan (EIDL), the Restaurant Revitalization Fund (RRF), or the Shuttered Venue Operators Grant (SVOG). However, these monies are likely to be depleted, if not completely depleted, and you may be wondering, “What’s next?”
While you may not need more debt, it is almost certainly the best guess for your business. There are no more government grant opportunities in the future, and it’s difficult to attract equity investors unless your business can expand quickly. Even if you could attract equity investors, you’d have to give up control of the company you built. While you must repay debt, the advantage is that you retain control of your business and generally return it over a lengthy period.
The first step in applying for a loan is to have your business’s finances in order. That means updating your accounts so you can prepare profit-and-loss statements and balance sheets, making sure your tax returns are as current as possible and ensuring you have a forward-looking marketing strategy so you can explain how you plan to spend money. Many small businesses and independent contractors who were not prepared in advance have lost out on opportunities.
Here are three debt financing options for your business that you could consider:
1. Loans from a bank
To manage a business and provide borrowed financing, working with a full-service financial institution is still practically mandatory. PPP taught us that businesses with strong banking relationships—not just an account but a personal connection with an account manager—could qualify for and get PPP loans far more easily and quickly. Furthermore, businesses with local bank accounts did far better than those with national chains.
Before deciding on the amount of a mortgage or line of credit, the length of a period, and interest rates, banks will take a close look at your credit score rating, business cash flow, last two years’ tax returns, and purposeful use of funds. They may also need to secure your loan with your company’s property or, in certain cases, your personal property. This means that if you fail on your mortgage, you’ll have to sell these or your other properties to pay off the debt. It’s a good idea to shop around for the best bank with the best terms.
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Living in an economically disadvantaged or underserved area, community development financial institutions (CDFIs) are also a great option. CDFIs are financial institutions such as banks and credit unions and mortgage funds and venture capital funds, whose mission is to expand financial opportunities for low-income and minority groups. These loans are easier to get, come with lower interest rates, and business development assistance. The disadvantage is that the application process and receiving of cash might take significantly longer than with banks or other sources of finance.
Loans from the SBA
SBA loans are divided into many categories:
Catastrophe Loans For Financial Damage (EIDL)
The EIDL program is a regular SBA program for parts of the country that have been devastated by natural catastrophes such as hurricanes, fires, or other unforeseen events that affect communities. The SBA determined that the whole country was a disaster area in the case of Covid, allowing any company to apply for these loans.
Applying for an EIDL loan is simple and maybe done at www.sba.gov/eidl. EIDL loans have a limit of $500,000, with the average mortgage being about $150,000 and repayment duration of 30 years. The funds are intended to be used as working capital to cover routine and routine expenses. The SBA has implemented a two-year freeze on the initial fee due to Covid. However, interest continues to accumulate. An EIDL mortgage has a 3.5 percent interest rate, one of the lowest rates available. Non-profit organizations may also get an EIDL loan with a 2.5 percent interest rate. The Covid EIDL loans also included a grant of $1,000 per employee up to ten employees or $10,000; however, high demand reduced this to $1,000 regardless of the number of employees.
Because of Covid’s continuous success, EIDL loans will be available until December 31, 2021, and if you currently have one, you may be eligible for a bigger loan. If you’re qualified for a loan modification, the SBA will contact you right away with more information and instructions, so keep an eye out for that email.
Loans from the Small Business Administration (SBA) under 7(a)
The 7(a) program is the most frequent SBA loan, and it may be used for both short and long-term working capital, debt refinancing, and the purchase of furniture, fixtures, and supplies. These loans are especially useful when real estate is involved, such as purchasing or constructing a new building or renovating an existing one. Regardless, it isn’t mandatory.
You apply for 7(a) loans via your bank, and they’re guaranteed to the tune of 85% on loans up to $150,000 and 75% on loans beyond $150,000. You’ll need the same papers as a bank loan to apply. This includes, among other things, personal and business financial documents such as balance sheets and profit-and-loss statements, as well as tax returns, business licenses, and business plans.
Five hundred four loans are available via the Small Business Administration.
SBA 504 loans provide up to $5 million in long-term, fixed-rate financing for fixed assets that “support company growth and employment creation.” You must be conducting business in the United States, have an online worth of less than $15 million, and yearly revenue after taxes of less than $5 million in the past two years to be eligible for a 504 loan. You apply for the loan via Licensed Growth Facilities (CDCs), SBA community partners that work to improve their communities’ financial situation. CDCs will also consider your marketing plan, management experience, and ability to repay the loan, among other things.
The 504 loans may be used to buy or renovate existing buildings or property and new facilities and long-term equipment and equipment. They can’t be used for working capital or inventory, debt consolidation, repayment, refinancing, speculation, or real estate investment. The loans may be repaid over a 10-, 20-, or 25-year term, and interest rates are typically set at a percentage point higher than the current market rate for 5- and 10-year US Treasury bonds.
Bonds for small businesses
The SMBX, a revolutionary new fintech financing market located in San Francisco, has created a platform for small and medium-sized businesses to issue bonds to their consumers, community, and institutional investors. The firm provides a free underwriting service to determine how much credit the small business may get, interest rate, and how long.
The amount of money collected varies between $25,000 to $5 million. Interest rates typically range from 4% to 10%, with a one- to ten-year time horizon. Different loan packages don’t provide a few alternatives that the SMBX platform does.
Apart from the mortgage, there is almost certainly no other benefit to what you’re selling. To begin, whether you borrow money from the SBA or a financial institution, you must repay them the principle and interest. Your customers are your customers with SMBX, so when their main and interest payment hits their account each month, they’ll get a reminder about what you’re selling. Similarly, the money you earn remains in your community. Plus, even if your customers and neighbors aren’t equity owners in your company since bonds are debt, they nevertheless experience a sense of ownership that might lead to increased sales and check sizes.
Second, the SMBX provides free advertising in conjunction with your bond offering. In many cases, businesses find that the advertising services they acquire are more valuable than the funds they borrowed. So, as soon as your business is listed on the exchange, the SMBX marketing team will send your online follower’s emails and social media advertisements. They may provide flyers, mailers, marketing content, and message and aesthetic development.
Get funding for your business before you need it.
It’s exceedingly improbable that the economy will ever completely shut down again, at least not throughout the country. However, many limitations have already been reintroduced, and many businesses are still recuperating from the previous year. In this business situation, it’s critical to avoid being undercapitalized. While the idea of taking on debt (or more debt) may not appeal to you, it is the best way for small businesses to get the funds they need to survive, grow, and prosper.
Concerning the Creator
Neil Hare is an legal professional and President of GVC Strategies, the place he makes a speciality of small enterprise coverage, advocacy, and communications campaigns; comply with him on Twitter @nehare and on LinkedIn. See extra of Neil’s articles and full bio on AllBusiness.com.
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