By Neil Hare
The old business adage that the time to fix the roof is when the sun is shining has never been more relevant than it is now. Many businesses have seen their activity increase in recent months, but with the Delta variant still a threat and the flu season officially underway, there could be another peak in Covid cases on the horizon. As this can lead to further government restrictions, now is the time to access the business capital you may need down the road, including considering debt financing options for your business.
During the pandemic, you likely found a way to keep your business afloat by pivoting, innovating, or accessing government relief funds like the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL), the Restaurant Revitalization Fund (RRF), or the Shuttered Venue Operators Grant (SVOG). But those funds are probably dwindling, if not completely, and you may be wondering, “What’s next? “
While you might not want to take on more debt, this is probably the best bet for your business. There are no more federal grant programs on the horizon, and it’s hard to attract equity investors unless your business can scale quickly. And, even if you could attract equity investors, you should dilute your stake in the company you created. While, of course, you have to pay off your debts, the advantage is that you retain control of your business and usually have a long time horizon to pay them off.
The first step in applying for a loan is to prepare your business finances. This means updating your books so you can generate income statements and balance sheets, make sure your tax returns are as up to date as possible, and make sure you have a forward-looking business plan so you can explain how you plan to use funds. Many small businesses and independent entrepreneurs who were unprepared for this have missed out on opportunities in the past.
Here are three debt financing options for your business that you can try to access:
1. Bank loans
Working with a full-service bank is still almost necessary to run a business and find loan capital. Again, a lesson learned from PPP was that companies with strong banking relationships – not just an account but a personal relationship with an account manager – were able to apply for and obtain PPP loans at a much easier and faster pace. . Additionally, companies with accounts at local banks, rather than national chains, have also fared much better.
Banks will carefully review your credit score, the company’s cash flow, the last two years of tax returns, and the intended use of funds before deciding on a loan or line of credit amount. duration and interest rates. In many cases, they will also want to secure your loan with the assets of your business or, in some cases, your home. This means that if you don’t pay off your loan, you will have to sell those assets or your house to pay off the loan. It is a good idea to shop for the right bank which may offer the best deal.
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Community Development Financial Institutions (CDFIs) are also a good option if you live in an economically disadvantaged or underserved community. CDFIs are banks or credit unions, loan funds and venture capital funds, whose objective is to expand economic opportunities for low-income and minority communities. These loans are more easily accessible, have lower interest rates, and come with business development assistance. The downside is the application times and the receipt of funds can take much longer than banks or other sources of funding.
2. Loans for small business administration
There are several types of SBA loans:
Economic disaster loans (EIDL)
The EIDL program is a traditional SBA program for areas of the country affected by natural disasters such as hurricanes, fires, or other unforeseen events that devastate communities. In the case of Covid, the SBA determined the entire country to be a disaster area, allowing every business to apply for these loans.
Applying for an EIDL loan is fairly straightforward and is done directly through the SBA website at www.sba.gov/eidl. The EIDL loan limit is $ 500,000, with a typical loan of around $ 150,000 with a repayment term of 30 years. The money is intended for working capital to meet normal and customary expenses. Due to Covid, the SBA has also instituted a two-year moratorium on the first payment, although interest is accrued. The interest rate on an EIDL loan is 3.5%, which is one of the lowest rates you will find. Non-profit organizations can also benefit from an EIDL loan at an interest rate of 2.5%. The Covid EIDL loans also came with a grant of $ 1,000 per employee up to 10 employees, or $ 10,000, although strong demand reduced that amount to $ 1,000 regardless of the workforce. your employees.
Due to the continuing effects of Covid, EIDL loans are still available until December 31, 2021, and if you have already received one, you may be eligible for an increased loan amount. If you are eligible for an increase on your existing EIDL loan, the SBA will contact you directly with more information and instructions, so be on the lookout for this email.
SBA Loans 7 (a)
The most common SBA loan is the 7 (a) program, which can be used for short- and long-term working capital, refinancing existing debt, and purchasing furniture, fixtures, and supplies. These loans are most useful if real estate is part of the equation, such as buying or constructing a new building or renovating an existing building. However, this is not compulsory.
To apply, you will need the same documents that are required for a bank loan. This includes personal and business financial statements, such as balance sheets and income statements, tax returns, business licenses, and business plans, among others. You apply for 7 (a) loans from your bank and they are 85% guaranteed on loans up to $ 150,000 and 75% on loans over $ 150,000.
SBA 504 loans
SBA 504 loans provide long-term, fixed-rate financing of up to $ 5 million for major capital assets that “promote business growth and job creation.” To qualify for a 504 loan, you must be doing business in the United States, have a net worth of less than $ 15 million, and annual after-tax income of less than $ 5 million for the previous two years. You apply for the loan through Certified Development Centers (CDCs), which are SBA community partners who promote economic development in their communities. The CDC will also assess your business plan, management experience, and ability to repay the loan, among other factors.
504 loans can be used for the purchase or renovation of existing buildings or land, new facilities or long-term machinery and equipment. They cannot be used for working capital or inventory, consolidation, debt repayment or refinancing, or speculation or investment in rental property. Loans can be repaid over 10, 20, or 25 year terms, and interest rates are automatically tied at a percentage higher than current market interest rates for 5 and 10 year US Treasury bonds.
3. Obligations of small businesses
SMBX, a new San Francisco-based fintech finance marketplace, has developed a platform for small and medium-sized businesses to issue bonds to their clients, the community, and institutional investors. The company offers a no-charge underwriting service to determine how much credit the small business can qualify for, at what interest rate, and for how long.
The capital raised varies from $ 25,000 to $ 5 million. Interest rates generally vary between 4% and 10% and the time horizon is 1 to 10 years. The SMBX platform offers a few features that other loan programs do not.
First, if you borrow money from the SBA or a bank, you repay the principal and interest to those entities. There is probably no benefit to your business other than a loan. With SMBX, your investors are your customers. So each month, they get a reminder about your business when the principal and interest payment arrives in their account. Likewise, this capital remains within your community. Additionally, even if your customers and community don’t own stock in your business because bonds are debt, they still feel pride in owning, which can lead to more sales and increased profit. size of checks.
Second, the SMBX also offers free marketing around your bond offering. So, once your business is publicly traded, the SMBX marketing team will provide email and social media marketing to your online followers. They provide messaging and creative development and may also provide flyers, direct mail or advertising copy. In many cases, companies find that the marketing services they receive are worth more than the cost of borrowed capital.
Get capital for your business before you need it
It is highly unlikely that there will be a complete economic shutdown again, or at least not in most of the country. That being said, many restrictions are already coming back and many businesses are still recovering from last year. It is essential to avoid being under-capitalized in this business environment. While the idea of getting into debt (or getting more into debt) may not sound appealing, it’s still the best bet for small businesses to get the capital they need to maintain, grow, and prosper.
About the Author
Neil Hare is a lawyer and president of CVM strategies, where he specializes in small business policy, advocacy and communication campaigns; follow him on twitter @nehare and on LinkedIn. See more articles from Neil and the full biography at AllBusiness.com.
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This article was originally published on AllBusiness.com.