At every business stage—starting out, sustaining or growing—one requirement is a constant: money.
And even though it doesn’t always seem so, there are more financing options available to small and mid-size businesses and entrepreneurs than ever.
Like the adage about working smarter not harder, the secret is in being smarter about financing.
But the smart choice may not be the easy or obvious one. The first step is identifying your need and timing, so financing solutions can be matched most effectively.
Different situations are better served by different solutions.
If you’re either starting a business up or still in “new business” mode, most traditional banks aren’t very interested in fronting your capital—it’s just too risky for their blood.
But there’s a caveat: the Small Business Administration. The SBA doesn’t make loans; it guarantees them. But the SBA was created to help entrepreneurs start and grow new businesses, and there are many banks that leverage the SBA guarantee in order to serve SMBs just like you.
In addition to the SBA, there are other guaranteed lending programs specifically structured for launching or expanding small businesses: the USDA Rural Development program and Farm Service Agency are a couple that target rural and agricultural areas.
The key to any bank-related financing is always the quality of your business and financial planning. Credit analysts couldn’t care less about entrepreneurial passion; they want to see numbers that make sense. Failing to properly plan your business is absolutely asking for a rejection of your loan application.
CRISIS OR CASH CRUNCH
At some point, every business hits an unexpected and unpredictable hurdle, from machinery breakdowns to market turndowns to supplier shutdowns. Typically, such crises never occur when a business is flush with cash; it’s usually just the opposite.
When an emergency arises at the worst possible time, quick access to financing can be critical. There are two types of borrowing that can help in such a situation: term loans and lines of credit.
A term loan is a traditional arrangement where you borrow X amount of money and pay it back over Y number of months. The SBA is an excellent resource for operating businesses facing a challenge. But since you have to borrow the amount of a term loan all at once, you may wind up paying interest on money that you don’t need.
Lines of credit are more flexible, because although you agree to borrow X amount of money over time, you only access or “draw” out money in increments as you need it. If you need all the money, it’s there, but if you only need half of it, that’s all you pay interest on.
The SBA offers a Capline product that is designed specifically for small businesses that may need periodic access to additional financing.
If you’re successful, your business will grow — but many SMBs are unprepared for the cost of growth. Expanding your business means expanding operations: hiring more people, turning more inventory, buying new equipment, adding new technology or opening a new location.
Most growing businesses are again confronted with financing needs that are both cost-effective and practical. Longer-term loans are usually the most attractive for these purposes.
SBA and other guaranteed loans are ideal solutions for large growth-related expenses, especially if there are large inventory assets, major equipment or commercial real estate involved.
The bottom line in SMB financing is, do your homework, understand your options, and make sure you speak “bank” when preparing your application and supporting documentation. Good luck in your business ventures!