Alternative Small Business Funding
Alternative Business Funding Versus SBA Loans
What to Take into Consideration in the Midst of Covid-19
As the Covid-19 pandemic has taken the entire world hostage, Pres. Trump recently announced an emergency relief fund of $50 billion for owners of small businesses through the SBA (Small Business Administration). The announcement about this funding came about because of the way small businesses are struggling during the pandemic. Although the availability details regarding the SBA funding haven’t come out yet, you should be mindful of several considerations when you’re applying for an SBA loan. The following article will address what you need to know when filling out your application. You also learn about some funding alternatives, allowing you to decide which approach to take to secure capital for your company.
SBA Loans
Many resources and business loans are available for all types of small businesses through the SBA. This includes disaster loans that companies can use to recuperate from a natural disaster, and that includes Covid-19. There is also funding for businesses owned by veterans, minorities, and women. Export businesses can even receive funding. The following is a list of several popular loan programs offered by the SBA:
- SBA 7(a) Loans – these loans allow you to receive as much as $5 million, which you can use for just about any purpose. That includes buying real estate, refinancing existing debts, purchasing equipment, and working capital expenses. These loans are generally issued to established businesses, as opposed to start-ups.
- SBA Express Loans – you’ll be able to get as much as $350,000. The approval process is quick, and you will obtain a decision in 36 hours or less. These types of loans come with interest rates that are higher than the 7(a) loans. It could take up to four weeks for your loan to be approved based on the lender you’re dealing with.
- SBA Microloans – these types of loans give you as much as $50,000 in cash. As suggested by the name, these smaller loans are provided by non-profits and community lenders. The process of being approved is faster. Loans like these tend to be utilized by start-ups to purchase inventory or equipment. Established businesses generally use the money for working capital.
Requirements for an SBA Loan
The process of obtaining an SBA loan is just like the requirements for a regular business loan. However, requirements vary as per SBA lenders and the loan itself. The SBA doesn’t lend money directly, though. Rather, they offer a repayment guarantee from lenders that are SBA-approved.
For the most part, an SBA lender will require the following (in addition to a loan application) in order to come to a decision:
- Legal documents.
- Personal guarantee and collateral for a loan. Business and personal returns for your income taxes (dating back to the previous three years).
- Existing financial statements.
- A plan describing the ways a loan will be used.
- Business license/certificate.
- Analysis of competitors.
- Schedule of business debts.
- Expectations of sales.
- Credit score (must be “Excellent”).
- A solid business plan.
- Company management resumes.
Considerations for SBA Loans
Before applying for an SBA loan, you must think about how the process works, as well as the terms of a loan. If you cannot have a loan repaid, you may wind up paying much more than you originally expected. SBA loan repayment schedules are generally longer and contingent on how money is expected to be used. Below is an average SBA loan repayment schedule:
- For property financing, repayment schedules may be as long as 25 years.
- For purchasing equipment, repayment schedules may be as long as ten years.
- For any short-term requirements, repayment schedules may be as long as seven years.
Repayment terms that are longer is both a blessing and a curse for businesses that are strapped for cash. A longer repayment time equates to paying more money over the loan’s term. Further, if you can secure a low-interest rate on your SBA loan, then you may end up paying a lot more, as far as interest costs go.
SBA Lender Selection
When applying for an SBA loan, choosing a suitable lender is crucial. SBA loans are not offered by all lenders. The ones that do offer them may not provide the versatility that you require. As such, it is crucial to meticulously scrutinize each lender when evaluating your options. Establish the amount of loan applications each lender generally receives, on average, as well as what portion of them get approved. Besides their employees’ SBA loan experience, observe the minimum and maximum amounts that they are open to approving.
As far as small business funding is concerned, there are multiple options to finance your organization. Refrain from using the very first lender that you come into contact with.
Qualifying for an SBA Loan
One of the most pursued loan products out there are SBA loans. With comprehensive documentation and qualification criteria, eligibility for an SBA loan can be quite stringent. For a start-up, SBA loan qualification may be out of reach, as many lenders are hesitant to give money to a company with no credit history (or very little of it). Even if your business is profitable, you may not be eligible for an SBA loan if your credit score is low.
The process of applying for an SBA loan is lengthy and tedious. Once an application is submitted, a lender will take several weeks – possibly even months – to come to a decision. Suffice it to say, this can work against you if the funding you need is for immediate expenses, or if the money is needed to cover some sort of emergency. If you want to capitalize on growth opportunities that are time-sensitive, this period of waiting will not work in your favor.
Another key aspect to consider is the personal guarantee or collateral you will need to come up with as part of the SBA loan process. You will need to put up a valuable asset – perhaps your property or automobile - in order to balance out a business loan risk.
Advantages and Disadvantages of an SBA Loan
Advantages
- Access to extra capital.
- Reduced interest rates (via government backing).
- Several options for SBA loans.
- Extended repayment schedules.
- Reduced down payments.
- SBA resource access.
Disadvantages
- Lengthier application process.
- Interest rates are fairly high.
- Borrower requirements are stringent.
- Personal guarantee or collateral is typically required.
- Credit score must be Excellent.
Alternative Business Funding to SBA Loans
As far as financing for small businesses is concerned, you don’t have to rely on an SBA loan as a sole option. In fact, several alternatives are available that provide funding with fast capital access, including the following:
Commercial Credit Lines
A commercial credit line is a very popular business financing option. It works just like a standard business loan, but the credit it provides is revolving. A commercial credit line allows you to borrow cash based on what your credit limit is. Interest is paid on an amount borrowed from a credit limit you are approved for (withdrawal fees also apply). Commercial credit lines generally come with credit limits that are higher in comparison to annual fee credit cards.
Commercial Credit Cards
Commercial credit cards offer fast access to credit that revolves. It allows you to borrow money to cover the costs of anything you need based on the credit limit you are approved for. Once the cash is used, money that you have borrowed from the card must be paid back. Whatever your specific credit limit is will be restored once repayment has been made. Commercial credit cards generally come with higher interest rates. Interest charges can be bypassed by repaying your balance by a specified date.
Crowdfunding
Capital for a small business is raised through individual investors. Once capital for a company is raised with a crowdfunding campaign, you will need to give investors something as compensation for whatever amount they have invested. For some, that could entail providing partial ownership of either your services/products or your overall business.
Crowdfunding is ideal for new businesses and start-ups that endeavor to have capital raised. Be mindful that a crowdfunding campaign warrants plenty of time – perhaps even months – in order to compete with others, as well as to establish a certain funding goal. Mind you, if you cannot meet the fundraising goal, then whatever money you did raise will need to be returned.
Loans for Small Businesses
Online loans for small businesses that come from an alternative business funding lender happens to be a worthwhile option if you require cash fast, but don’t have time to undergo a rigorous application process. Alternative business funding lenders (a.k.a. online lenders) provide simple application processes with fast decisions (generally within one business day). A loan for a small business allows a company to secure as much as $500,000 in capital. This money can be funded within one business day, as opposed to weeks (or even months), as per standard SBA loan waiting times.
The process of applying for these types of loans is easy. It comes with minimal restrictive requirements. Your company should be in business for at least 12 months, have made $100,000 yearly in revenue, and be able to provide three months' worth of commercial bank statements. Online small business loans can help establish your company’s credit score, as well as its borrowing history. As such, if you were to secure a smaller loan, you may be able to secure an SBA loan down the road, too.
Alternative Business Funding Lenders – Advantages and Disadvantages
Advantages
- Funds can be used however you want.
- Funding is obtained within one business day, on average.
- Briefer repayment schedule, allowing you to bypass debt better.
- Financing is secure, even if your credit is subpar or non-existent.
- No collateral or down payment required.
- Requirements are straightforward.
- The process of applying for the loan is easy.
- The loan approval process (and subsequent funding) is quick.
Disadvantages
- Hidden fees might be charged by some lenders.
- Lack of government backing.
- Not ideal for start-ups.
Alternative Business Funding Lending Versus SBA Loans
Trying to choose between an online loan for small businesses and an SBA loan may be confusing. Longer terms, loan amounts, and low-interest rates can make the application for an SBA loan worthwhile. On the other hand, stringent eligibility requirements and longer application processing durations can make getting approved quite challenging. You are encouraged to conduct the necessary due diligence. Seek out choices that accommodate the financial needs of your company. There are a variety of financing choices available to you that can give your organization the capital required for it to succeed and grow.
