If your small business suddenly needs a big cash injection, don’t despair. Many different financing options are available that might be a better fit for you than a traditional bank loan, and easier to obtain. The problem is, many business owners just don’t know about them.
My sister and I are small business owners, but we were almost ex-small business owners. Though our yoga studio had been thriving in the same leased premises for six years, the lease had become untenable and we didn’t want to re-sign. Relocation costs for our type of business are significant, so we faced the real possibility of having to close our doors and not being able to reopen elsewhere.
If not for our local bank taking the time to help us explore all our financing options – including ones we hadn’t considered – it’s likely our business wouldn’t have survived. Because of the time it would take to build new premises, we knew we wouldn’t have an income stream for about two years. Nonetheless, we managed to secure funds to purchase land and then build our new state-of-the-art facility, which recently opened for business. Here’s what we learned along the way about four often overlooked financing options that might just help save your own small business too.
A government-backed Small Business Administration loan through our local bank, First Horizon, was the option that best suited our particular circumstances. SBA loans can be a powerful means for entrepreneurs to start or grow a business, and though the process can be complex, don’t let that dissuade you. Just make sure you partner with a good, patient lender who’s willing to help you navigate the paperwork.
The SBA doesn’t directly lend money. Instead, it guarantees a portion of loans made by lenders, including commercial banks, private lenders, microlenders and community development organizations. There are nine main types of SBA loans, depending on how much you want to borrow (up to $5M), the repayment term (three to 25 years) and the purpose of the loan. SBA-backed loans can be used to buy real estate, equipment or inventory; for expansion, renovation or working capital; or to refinance or consolidate debt. With the government acting as your guarantor, potential advantages of SBA loans over traditional bank loans include lower down payments, longer terms and more relaxed requirements for collateral.
Though SBA loans can be used to buy large equipment items such as vehicles, machinery and appliances, you might also consider a non-SBA equipment loan, which requires less paperwork and can usually be approved quickly.
Non-SBA equipment loans are made by a bank or equipment financing company with a typical repayment term of between one and five years (SBA equipment loans are 10 years, or up to the useful life). The loans are generally secured by the equipment that’s being purchased, so you won’t need to provide the lender with additional collateral, such as your home. Unlike an equipment lease, an equipment loan means you actually buy the equipment and own it long term.
Working capital loans
Recent research by the National Small Business Association found that when owners were unable to access borrowed capital, 31 percent struggled to grow their businesses and 2 percent had to close stores or branches. There are SBA and non-SBA options for working capital loans, which are used for day-to-day expenses like payroll or rent, rather than to purchase long-term assets.
Non-SBA working capital loans have relatively short repayment terms (three to 36 months) while terms for the SBA equivalent are typically between seven and 10 years. The loans come in different types for different purposes. For example, if your business has a recurring cash-flow issue, a line-of-credit working capital loan provides funds that you can then reuse each time you repay the loan. With a line of credit, you only pay for whatever funds you actually borrow for the period, which can reduce your overall costs.
Accounts receivable financing
Also known as invoice financing or factoring, accounts receivable financing may assist the one in three small business owners with cash-flow problems. The financing is made available through commercial banks or microlenders. Some will simply offer you a line of credit against your business’s unpaid invoices, while others will purchase those invoices from you. Your choice of product will be influenced by whether you’d like your lender to start collecting money from your customers or you’d prefer to continue doing that yourself.
Non-SBA accounts receivable financing can be accessed quickly (within one to three days) and often with lower costs than other loan options. It is, though, only designed to help you overcome short-term cash-flow hurdles, not for long-term growth projects or refinancing debt. Another consideration is that if you have a better credit rating than your customers, you may be able to get a much lower rate with a line of credit or a term loan.
Dina Shabayek and her sister Nora Shabayek are co-owners of Fahrenheit Yoga, a state-of-the-art hot yoga studio in Nashville, Tennessee. The business re-opened at its new location in May 2019, financed with an SBA-backed loan through First Horizon Bank. Follow us @fahrenheityoga.