By Neil Hair
The old business adage that the time to fix the roof is when the sun is shining has never been more important than now. Many companies have seen an uptick in activity over the past few months, but with the variable delta threat and flu season officially looming, there could be another spike in Covid cases on the horizon. Since this could lead to new government restrictions, now is the time to access the business capital you may need later, including considering debt financing options for your business.
During the pandemic, you’ve likely found a way to keep your business afloat by pivoting, innovating, or accessing government relief funds such as the Paycheck Protection Program (PPP), Economic Disaster Loan (EIDL), Restaurant Revitalization Fund (RRF), or Operator Grant. Enclosed spaces (SVOG). But, that money will likely diminish if not completely, and you may be wondering, “What next?”
While you may not want to get into more debt, this is probably your best bet for your business. There are no more federal grant programs on the horizon, and it’s hard to attract stock investors unless your business is able to expand quickly. And even if you can attract stock investors, you will have to dilute your ownership in the business you have created. While, of course, you have to pay off the debt, the advantage is that you retain control of your business and can usually have a long horizon to pay it off.
The first step in applying for loans is to prepare the finances for your business. This means updating your books so you can create profit and loss statements and a balance sheet, making sure your tax returns are as current as possible, and making sure you have a future business plan so you can explain how you plan to use the money. Many small businesses and independent contractors who were not prepared accordingly have missed 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 required to run the business and source debt capital. Again, the lesson of the PPP was that those companies with strong banking relationships – not just an account but a personal relationship with an account manager – were able to apply and secure PPP loans at a much easier and faster pace. In addition, companies with accounts in local banks, rather than national chains, fared much better.
Banks will take a close look at your credit score, business cash flow, last two years of tax returns, and planned use of funds before deciding on loan size, line or credit, term length, and interest rates. In many cases, they will also want to secure your loan with either your business assets or, in some cases, your home. This means that if you default on the loan, you will need to sell those assets or your home to pay off the loan. It is a good idea to shop for the right bank that can offer the best terms.
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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, which aim to expand economic opportunities for low-income and minority communities. These loans are more easily obtainable, have lower interest rates, and come with business development assistance. The downside is that application times and receipt of funds can take much longer than banks or other funding sources.
2. Small Business Administration Loans
There are several types of SBA loans:
Economic Disaster Damage Loans (EIDL)
The EIDL program is a traditional SBA program for areas of the country that have experienced natural disasters such as hurricanes, fires, or other unexpected events that devastate communities. In the case of Covid, the Small Business Administration determined that the entire country was a disaster zone, allowing every business to apply for these loans.
Applying for an EIDL loan is fairly easy and is done directly through the SBA’s website at www.sba.gov/eidl. The maximum EIDL loan limit is $500,000, with a typical loan being around $150,000 with a repayment period of up to 30 years. The funds are earmarked for working capital to cover regular and customary expenses. Because of Covid, the SBA has also imposed a two-year hold on the down payment, even though interest has accrued. The interest rate for an EIDL loan is 3.5%, which is one of the lowest rates you will find. Nonprofits may also qualify for an EIDL loan at a 2.5% interest rate. The Covid EIDL loans also came with a grant portion that was $1,000 per employee up to 10 employees, or $10,000, although high demand cut that amount to $1,000 regardless of how many employees you have.
Due to the ongoing effects of Covid, EIDL loans are still available until December 31, 2021, and if you have already taken out a loan, you may be eligible for an increased loan amount. If you qualify for a raise on your existing EIDL loan, the SBA will contact you directly to provide you with more information and guidance, so be on the lookout for this email.
SBA 7(a) Loans
The most popular SBA loan is Program 7(a), which can be used for short and long-term working capital, refinancing of existing debt, and purchases of 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 one. Not required, though.
In order to apply, you will need basically the same paperwork that is required for a bank loan. This includes personal and business financial data, such as balance sheets, profit and loss statements, tax returns, business licenses, and business plans, among other items. You apply for 7(a) loans through your bank that 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 key fixed assets that “promote business growth and job creation.” To be eligible for a 504 loan, you must do business within the United States, have a net worth of less than $15 million, and have an annual after-tax return of less than $5 million for the past two years. You can apply for the loan through Accredited Development Centers (CDCs), which are SBA’s community partners that promote economic development in their communities. Loan development centers will also assess your business plan, management experience, and ability to repay the loan, among other factors.
The 504 loans can be used to purchase or renovate existing buildings or land, new facilities, or long-term machinery and equipment. They cannot be used for working capital or inventory, debt consolidation, repayment or refinancing, speculation or investment in rental real estate. The loans can be repaid over 10, 20 or 25 years, and interest rates are automatically pegged to a percentage higher than current market interest rates for 5- and 10-year US Treasury bonds.
3. Small Business Bonds
SMBX, a San Francisco-based new fintech finance marketplace, has developed a platform for small and medium-sized businesses to issue bonds to their clients, community, and institutional investors. The company offers a no-cost underwriting service to determine how much credit a small business can qualify for, at what interest rate, and over the time horizon.
The raised capital ranges from $25,000 to $5 million. Interest rates are usually between 4% and 10% and the time horizon is 1-10 years. The SMBX platform offers several features that other lending programs do not provide.
First, if you borrow money from an SBA or a bank, you pay principal and interest to those entities. There is probably no other benefit to your business other than a loan. With SMBX, your investors are your customers, so every month they receive a reminder of your business when principal and interest payments arrive in their account. Likewise, that capital remains within your community. Additionally, even though your customers and community aren’t stockholders in your business because bonds are debt, they can still feel proud of ownership that can generate more sales and increase check volumes.
Second, SMBX also provides free marketing around your bond offering. So once your business is listed on the exchange, the marketing team will provide SMBX via email and social media to your online followers. They provide messaging and creative development and can also provide flyers, mailings, or copy adverts. In many cases, companies view the marketing services they receive as more valuable than the cost of borrowed capital.
Get capital for your business before you need it
It is unlikely that there will be a complete shutdown of the economy again, or at least not in the majority of the country. However, many of the restrictions are already back and many companies are still recovering from last year. It is essential to avoid capital shortage in this business environment. While the thought of borrowing (or taking on more debt) may not sound attractive, it’s still the best bet for small businesses to get the capital they need to maintain, grow, and thrive.
About the author
Neil Hare Lawyer and President Global value chain strategies, where he specializes in small business policy, advocacy, and communications campaigns; Follow him on Twitter Tweet embed and on LinkedIn. See more of Neil’s articles and full bio at AllBusiness.com.
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This article was originally published AllBusiness.com.