3 leverage options to get the capital you need for your business
By Neil Hare
The old business adage that the time to repair the roof is when the sun is shining has never been more relevant than it is now. Many companies have seen spikes in activity over the past few months, but with the Delta variant still a threat and flu season officially on, there could be another spike in Covid cases on the horizon. As this can lead to new government restrictions, now is the time to access working capital that you may need later, including considering debt financing options for your business.
During the pandemic, you’ve probably found a way to keep your business afloat by using government aid 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 likely to wane, if not completely, and you may be wondering, “What’s next?”
Even if you may not want to take on more debt, this is probably the best choice for your business. There are no more government grant programs in sight and equity investors are difficult to attract unless your business can scale quickly. And even if you could attract equity investors, you’d have to dilute your stake in the business you built. While you will of course have to repay debts, the benefit of you being in control of your business and usually having a long time horizon to repay it.
The first step in applying for credit is to prepare your corporate finances. That means getting your books up to date to help prepare income statements and balance sheets, keep your tax returns as current as possible, and come up with a forward-looking business plan to explain your planning to use funds. Many small businesses and self-employed entrepreneurs who were not properly prepared have missed opportunities in the past.
Here are three leverage options for your business that you can access:
1. Bank loans
Working with a full-service bank is still almost required to run a business and raise outside capital. Again, one lesson from PPP was that companies with strong banking relationships – not just an account but a personal relationship with a customer service representative – were able to apply for and secure PPP loans much more easily and quickly. In addition, companies with accounts with local banks rather than national chains did much better.
Banks will carefully examine your creditworthiness, business cash flow, tax returns for the past two years and planned use of funds before deciding on the size of a loan or line of credit or a loan, the term and the interest rates. In many cases, they will also want to secure your loan with assets from your business or, in some cases, your home. This means that if you default on your loan, you will have to sell those assets or your home to repay the loan. It is a good idea to look for the right bank that offers the best terms.
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Community Development Financial Institutions (CDFIs) are also a great option if you live in an economically disadvantaged or underserved community. CDFIs are banks or credit unions, loan funds and venture capital funds that aim to expand economic opportunities for low-income and minority communities. These loans are easier to come by, 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 with banks or other funding sources.
2. Loans for small business management
There are several types of SBA loans:
Economic Injury 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 that the entire country was a disaster area, so any company could apply for these loans.
Applying for an EIDL loan is relatively easy and is done directly on the SBA website at www.sba.gov/eidl. The cap on EIDL loans is $ 500,000, with the typical loan being around $ 150,000 with a 30 year repayment period. The money is intended for working capital to cover normal and customary expenses. Due to Covid, the SBA has also set up a two-year moratorium on the first payment, although interest is incurred. The interest rate on an EIDL loan is 3.5% which is one of the lowest interest rates you will find. Non-profit organizations can also qualify for an EIDL loan at an interest rate of 2.5%. The Covid EIDL loans also included a grant portion of $ 1,000 per employee up to 10 employees, or $ 10,000, although high demand reduced that amount to $ 1,000 regardless of your number of employees.
Due to the ongoing effects of Covid, EIDL loans are still available through 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 in your existing EIDL loan, the SBA will contact you directly with further information and instructions. So keep an eye out for this email.
SBA 7 (a) loan
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, home furnishings, and supplies. These loans are most useful when real estate is involved, such as buying or building a new building, or renovating an existing one. However, it is not required.
For the application you need the same papers as for a bank loan. This includes personal and business accounts such as balance sheets and income statements, tax returns, trade licenses and business plans. You apply for 7 (a) loans through your bank and they are 85% guaranteed on loans up to USD 150,000 and 75% guaranteed on loans over USD 150,000.
SBA 504 loan
SBA 504 loans provide up to $ 5 million of long-term, fixed-income financing for essential assets that “drive business growth and job creation.” To be eligible for a 504 loan, you must do business in the United States, have net worth less than $ 15 million, and have annual after-tax sales of less than $ 5 million for the past two years to have. They apply for the loan through Certified Development Centers (CDCs), which are community partners of the SBA that promote economic development in their communities. The CDCs will also evaluate your business plan, management experience, and ability to repay the loan, among other things.
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, to consolidate, repay or refinance debt, or for speculation or investment in rental property. The loans can be repaid over a 10, 20 or 25 year term and the interest rates are automatically tied to a percentage above the current market interest rate for 5 and 10 year US Treasuries.
3. Small business bonds
The SMBX, a new fintech finance marketplace based in San Francisco, has developed a platform for small and medium-sized businesses to issue bonds to their customers, communities and institutional investors. The company runs a free underwriting service to determine how much credit the small business can get, at what rate, and over what period of time.
The capital raised ranges from $ 25,000 to $ 5 million. The interest rates are usually between 4% and 10% and the time horizon is 1-10 years. The SMBX platform offers some features that other loan programs do not.
First, when you borrow money from the SBA or a bank, you pay back the principal and interest to those companies. There is probably no other benefit to your business other than the loan. At SMBX, your investors are your customers and receive a reminder of your business every month when the principal and interest payments are received in their account. Likewise, this capital remains in your community. Even if your customers and those around you are not shareholders in your business because bonds are debt, they still feel the pride in ownership, which can lead to more sales and larger check sizes.
Second, the SMBX also offers free marketing around your bond offering. Once your company is listed on the stock exchange, the SMBX marketing team offers email and social media marketing to your online followers. They offer messaging and creative development and can also provide flyers, mailers or copywriting. In many cases, companies see the marketing services they receive as being of greater value than the cost of the capital borrowed.
Get capital for your business before you need it
It is highly unlikely that there will be another complete shutdown of the economy, or at least not in most of the country. That being said, many restrictions are already returning and many companies are still recovering from last year. In this business environment, avoiding undercapitalization is crucial. While the thought of taking on (or taking on more) debt may not sound like tempting, it is still the best choice for small businesses to get the capital they need to sustain, grow, and prosper .
About the author
Neil Hare is an attorney and president of GVC strategieswhere he specializes in small business policy, advocacy and communication campaigns; follow him on Twitter @nehare and further LinkedIn. See more of Neil’s articles and the full bio on AllBusiness.com.
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This article was originally published on AllBusiness.com.