There've been some great business ideas that ran into trouble because owners didn't have small business funding to do everything it took to grow. Let's take an example of bandages for diverse skin colors. In 1998, New York-based entrepreneur Michael Panayiotis created Ebon-Aide bandages for darker skin. Customers who could find Ebon-Aide bandages in stores raved about them. But Panayiotis had spent all of his capital manufacturing and storing the bandages. He couldn't afford to market the bandages and his business ultimately failed.
What would have happened if Panayiotis had been able to get Ebon-Aides onto enough store shelves? He might have had a successful start-up and become an Ebon-Aide multi-millionaire!
Your business may not be selling a brand new, innovative product. You could want to expand your lawn care services, dog walking, or contracting business. Maybe you would like to reach new customers for your carpentry business, or know you can expand your pressure-washing business with new equipment. What about training and education? If you have a services business, getting a new certification or training to offer new services could help your business to grow. Getting enough capital to do what you want is one of the biggest small business challenges.
When should we seek small business financing?
Before you investigate business financing options, have a well thought-out plan for how much money you need, what you will use it for, and how you'll pay it back. Financing your business requires a positive cash flow and a plan to maintain or achieve it.
One of the worst reasons to seek small business financing is to prop up a failing business. Business lending institutions and granting organizations know this. Make sure you can handle the business you have first and are at least breaking even or earning a profit before seeking additional funding for small business growth.
Is there an exception to this? Yes — if you're a start-up or new business, no reasonable lender or grantor expects you to make a lot of money when you're just starting out. You'll need financial projections for your new business to apply for start-up funding. Lenders or granting organizations will want to see that you have reasonable break-even projections, a strong marketing plan, and an operating plan that fits your business size, market, and industry. Don't neglect one of the most important parts of an operating plan: business insurance.
What are the options for small business lending?
You have probably visited the Small Business Administration (SBA) website or local office. The SBA's resources can help you prepare to get an SBA loan offered through a financial institution.
SBA loans are the most common source ways of financing your business expansion and sometimes, business start-up. SBA loans fit into a few broad categories and some are available for special circumstances. They include:
- SBA 7(a) Loans - up to $5 million available for 10 to 25 year amortization terms
- CDC/SBA 504 Loans - a partnership between your local community development corporation (CDC), a conventional lender, and your business, CDC/SBA 504 loans could provide up to $20 million to buy commercial property.
- SBA CAPLines - a line of credit up to $5 million that's offered along with a Section 7(a) loan or a CDC/SBA 504 loan.
You'll also find other SBA-guaranteed loan products that include loans for businesses that are exporting products, microloans of up to $50,000, and disaster loans that can help your business recover from a natural disaster.
If your business is in a rural area, you may also be eligible for USDA business loans to modernize your business, repair equipment or facilities, buy inventory, refinance debt, and buy or rehab a facility.
To qualify for any government-backed loan program, you will need a good personal credit score (660 and above) and a positive business cash flow. Different programs require your business to be operating for different periods of time, but you need to have been in business at least one year at a minimum.
In addition to government-guaranteed loans, you can get conventional business financing through banks and other financial institution. Conventional loans include:
- Lines of credit
- Commercial real estate loans
- Commercial business loans
- Working capital loans (PayPal, Square, Kabbage)
For example, PayPal's working capital loan will provide up to $200,000 for business capital needs. You repay the loan out of your PayPal sales. Another option is Uplyft Capital's working capital loans (typically up to $1,000,000) to keep your business moving forward, as it allows you to borrow against future earnings to access that capital today.
Can I get a grant for my small business?
If your business creates jobs in your local area, you may be eligible for small business financing through your local economic development agency. State and federal grants are also available for business development, but usually for research and development. The Small Business Innovation Research (SBIR) grants are one example government grants for business. Different community development organizations may offer grants for businesses owned by women and minorities. You can also find private businesses, clubs, or organizations that offer grants or one-time awards for businesses that excel. Your industry or not-for-profit organizations may also sponsor annual awards, like the Alexia Foundation grants for professional photographers, which provide $20,000 for a one to three-month project.
No grants or awards are "easy" to get. Applications take as much or more time as applying for a small business loan.
What are other alternatives for small business financing?
Many businesses got their start or grew through private investment funding. You may not want to be a guest on "Shark Tank" or other angel investor programs. Your "angel investors" could be your family members and friends. Crowdfunding platforms like Kickstarter have become well established. Other crowdfunding sites include RocketHub and SeedInvest. Investigate the rules for the site that best fits your business and funding needs. Plan a campaign that can raise the funds you need to grow your business.
Don't overlook your business plan and business insurance.
A solid business, marketing, and operations plan are critical to your successful use of small business financing. High interest rates on a business loan might wipe out your profit. Or, you could experience a business interruption because of illness or accidents. Do you have adequate business insurance in that case? After you've put all the time and effort in a business plan, received your small business financing, and put your plans into action, the right insurance coverage could spell the difference between failure to grow and small business success.