The Different Ways Small Business Owners Can Obtain Financing

According to SBA (Small Business Administration) stats published in 2019, around 20% of business startups fail in the first year. Half of the those that managed to make it through the first 12 months fail within five years and a decade in, only 33% are still standing. The numbers have been even more sobering in the last two years since the pandemic and steep inflation has further rocked the economy and optimism.

Around a third of small businesses fail to a lack of cash. For savvy business owners who can keep expenses low, there are plenty of options available to obtain business cash to keep their companies afloat and eventually prosper. Knowing where to kind it, however, is often half the battle. If you fall into that category, read on.

Refinancing Commercial Property

For many business owners, the cash they need is right under their roofs — literally! A cash-out refinance of commercial property such as an office building, warehouse, retail space, medical center, or large residential building could provide a relatively easy way to obtain cash for equipment, inventory, or emergency expenses. With interest rates still comparatively low and real estate prices high, many business owners might find they have more equity than they thought stored within the walls of their business. A cash-out refi is probably one of the easiest ways to obtain money for the following reasons:

• Ease of transaction: The equity in the building already exists. A cash-out refinance is a relatively simple process once the lender has appraised the building and confirmed its value. In the case of small balance commercial real estate, value can be added by increasing rents.

• No seasoning required: If you purchased your property for cash or used a private hard money lender, the refi process can start immediately.

• The funds can be used for whatever reason you need: Whether you need working capital to improve the building, buy inventory, or to re-invest, there are no restrictions on what you use the money for

• The money is tax-free: Unlike selling a property or cashing out an IRA or 401K there are no tax penalties from a cash-out refinance.

• Claim capital improvements and mortgage interest on your taxes: If you take out a larger loan against your commercial property, you can claim the mortgage interest on your taxes. Also, if you use the extra money on your business, in real estate, for example, to improve the building and increase rents, you can also claim that on your taxes.

Equipment Financing

If you need equipment for your small business — from computers to combine harvesters, office stationery to stationary bikes — there’s a good chance there’s a loan with your name written on it. Banks, credit unions, and online lenders all offer equipment loans with differing programs and interest rates. Generally speaking, marketplace lenders will process your loan fastest with the least requirements but higher interest rates than government-approved SBA loans.

With many equipment loans available, some allow you to finance up to 100% equipment value. Borrowers can generally qualify with at least one year in business and $100,000 or more in annual revenue. Credit scores can be as low as 550 to 600. However, the better the credit, the greater the revenue, and the more equity you can provide for the purchase, the more funding you are likely to receive.

Working Capital Line of Credit

Working capital loans can be the lifeblood of any business. According to the State of Small Business Credit Survey, 58% of companies are more likely to seek capital for operating expenses than any other needs.

• Flexibility: A working capital line of credit allows business owners the flexibility of being able to access capital only when they need it and pay it back down when they are able. Like a Home Equity Line of Credit, interest only accrues when the money is used.

According to the Federal Reserve Banks’ State of Small Business Credit report, 35% of firms surveyed said they applied for BLOC, and of that number 71% were approved.

• Unsecured Options: Although some BLOCs are secured (ie. with collateral such as equipment or a building), unsecured options also exist. They generally have lower credit limits and higher rates than secured BLOCs but unsecured BLOCs have no real downsides and are often taken out by businesses if they don’t immediately need it, to serve as a safety net, in case they do.

• Multiple Uses: There is no restriction on the uses of a BLOC. They can be used for real estate, inventory, company vehicles, equipment, furniture, and more.

Term Loans

Unlike a BLOC, a business term loan starts accruing interest from the moment the lump sum arrives in your business’s bank account and the loan must be repaid every month, regardless of how much of the capital you use. Types of term loans you might already be familiar with are fixed-rate mortgages, car loans, and student loans. They serve a specific purpose which is usually explained to the lender before securing the loan. However, the loans can vary in their uses from:

• Equipment and inventory purchasing
• Real estate purchase
• Renovations
• Working capital
• Refinancing

• Stricter qualifications for traditional banks: In much the same way as applying for a mortgage a traditional bank will require the loan to go through underwriting (factoring in annual revenue, and credit scores). Qualifying for a term loan often takes longer than other types of financing.

• Online lenders offer more flexibility: Online lenders have looser qualification guidelines and shorter payback times than traditional banks but higher interest rates.

• Higher Loan Amounts: Term loans are offered by traditional banks, credit unions, and online lenders and can range in scope from $2,000 to $5 million with vastly different interest rates too.

• Amortized: Like a mortgage, business loans are amortized with mostly interest paid upfront until the principal balance reduces over time. Bank loan terms are usually 10 years.

• Multiple types of long-term loans: Long-term longs are not a one size fits all proposition. In conjunction with varying interest rates and loan amounts, repayment terms can also differ from short (12 months or less), medium (one to five years), and long (up to 25 years) as in the case of SBA 7(a) loans.

Collateral-Based Private Loan

Lenders prefer borrowers to have some ‘skin in the game’ when they lend money to them. They are less likely to default if they risk losing something. That’s why collateralized loans or secured loans come with higher loan amounts and better interest rates from the lenders than unsecured loans. Also, they tend to be less stringent on a borrower’s qualifications — specifically their credit scores and incomes. The risk to the borrower, as with home and car loans, is that they can risk foreclosure or repossession if they don’t make their payments.

Although real estate is the most common type of collateral, almost anything can be used as collateral as long as it can easily be liquidated to pay back the loan. Examples are:

• Art & jewelry
• Investment and retirement accounts
• Business equipment, inventory, and stocks
• Accounts receivable
• Cash in deposit accounts or due to the business

As long as there is significant collateral, private-based can be 50% to 70% LTV (Loan To Value) or LTC (Loan To Cost) and can close in as quickly as 7 days, as opposed to an SBA loan which can take up to 90 days. This is extremely helpful when a deal has to be closed quickly to stave off competition.

Cash is the life-blood of any business. With small businesses having such a high attrition rate it’s especially important to have enough money on hand to get you up and running. As explained by the Harvard Business Review, a business goes through various incarnations on its way to becoming successful. The longer it is around and moving through these stages, the greater its chances of success. Having the capital to see it through the early stormy weather is essential.

Why use your own money, when you can use someone else’s?

REID Lending Partners (RLP) offers fast and flexible loan solutions for property and business owners in the mid-Atlantic region.  If you are a business owner or property owner in need for additional capital for your business and investing goals, contact the team at REID Lending partners to guide you through the best financing solutions to suit your needs.