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5 Small Business Finance Options as Pandemic Relief Loans Wind Down

16. August 2020 06:41

By: Gerri Detweiler

 Whether or not your business took advantage of COVID-19 relief loans like Paycheck Protection Program (PPP) loans or Economic Injury Disaster Loans (EIDL), you may still need financing to weather these challenging times. While many lenders have pulled back on making new small business loans, there are some bright spots in the industry.

Here are five small business financing options that may be available if you’re looking for financing today:

1. Vendor Financing
Vendor or supplier financing is a popular type of small business financing in good times or bad. According to the Equipment Leasing and Finance Association, manufacturer or vendor financing accounted for about one-third of total market financing in 2018.

The last thing your vendors and suppliers want is to see businesses like yours stop purchasing. They depend on your business to help them stay in business. As a result they may be flexible with payment plans, offering longer repayment periods or extending credit if you’ve paid upfront in the past. It never hurts to ask.

Tip: Vendors and suppliers often review business credit. Check your business credit reports to make sure they are accurate and don’t contain negative information that could impact your ability to get financing.

2. SBA Loans
The most popular SBA loan programs in recent months have been COVID-19 related Paycheck Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL). Those programs are temporary, but there are a number of other SBA loans that continue to help small businesses with generally low interest rates and favorable terms. And, as part of SBA debt relief efforts, the SBA will pay six months of principal, interest, and any associated fees that borrowers owe for all current 7(a), 504, and microloans in regular servicing status as well as new 7(a), 504, and microloans disbursed prior to September 27, 2020.

That may make this a perfect time to get an SBA loan. Options include:

7(a) Loans. These loans are term loans for up to $5 million. Proceeds may be used for new construction; expansion or renovation; or to purchase land or buildings. They may also be used to purchase equipment, fixtures, or for lease-hold improvements; working capital; to refinance debt in certain circumstances; or as a seasonal line of credit or to purchase inventory. They may even be used to start a business. 

SBA loan data shows these loans have been secured by businesses with the NAICS code 337122: non upholstered wood household furniture manufacturing; NAICS code 321918: other millwork including flooring and 337110: wood kitchen cabinet and countertop manufacturing, among others.

7(a) Express Loans are smaller loans of up to $350,000 used for the same purposes as larger 7(a) loans. Decisions may be made more quickly, making these popular. The lender will be required to review a FICO SBSS score, which can take into account the personal credit data of all owners with 20% or greater ownership, as well as business credit and other financial data.

504 CDC Loans can be ideal for purchasing or expanding property and for purchasing or upgrading heavy equipment. They are made in a partnership where a private lender typically lends 50% of the project, a Community Development Corporation (CDC) lends 40% and the borrower puts up 10% of the project cost.

Export Working Capital and Export Express Loans may be ideal for businesses involved in direct or indirect exporting.

A guide to SBA loan programs is available through SCORE, an SBA resource partner.

3. Equipment Financing

Leasing may make it possible to invest in new equipment without a large outlay of cash. Lease financing may come through banks, independent financing companies or captive financing, which is usually a subsidiary of the company selling the equipment.

The fact that the equipment secures the financing reduces risk compared to unsecured financing, but lessors don’t want to be in the repo business. So regardless of the source of this financing there will be due diligence. A business and/or personal credit check may be required.

4. Crowdfunding

If your business involves selling directly to consumers, a crowdfunding campaign may help raise the funds needed for your next big project.

Kickstarter, a reward-based crowdfunding platform, has been used by a number of businesses in the woodworking space, including Refoundry, which trains formerly incarcerated people to repurpose discarded materials into home furnishings and incubate them into their own businesses; and Bookniture which unfolds from a book to furniture has raised almost $450,000 on the platform. 

One new Kickstarter program, Woven Wood solid wood fencing, was launched by Christopher Burkit, a Gulfport, MS
carpenter and designer for over 30 years. Burkit is seeking to raise $100,000

There are many platforms that facilitate crowdfunding in four main categories:

● Rewards-based: you offer a physical reward (such as a piece of furniture) to backers
● Loan-based: borrow money from the crowd. Kiva.org, for example, offers 0% loans of up to $15,000 to businesses impacted by COVID-19
● Equity-based: secure investors in your business. The most time-consuming and expensive option, it can be used to raise large sums of money (currently up to $1.07 million).
● Donor-based: get donations to help your business survive the crisis. There have been remarkable results with these campaigns on the GoFundMe platform recently.

The key to successful crowdfunding is a compelling marketing campaign combined with a way to reach your target audience. Cultivating fans by email or social media can make the difference between success and failure.

5. Invoice Factoring

If your customers are generally creditworthy but pay slowly, invoice factoring may help your cash flow. This type of financing generally comes in two broad flavors:

● Invoice factoring: you sell unpaid invoices to a factoring company, which then collects payment from your customer
● Invoice discounting: unpaid accounts receivable serve as collateral for loans

This type of financing is offered by nearly 850 firms, including some large banks as well as smaller firms according to IBISWorld. Online fintech (short for "financial technology") firms may offer very fast credit decisions.

Regardless of the type of financing you explore, make sure you understand the costs involved. Small business financing generally does not require lenders to disclose an interest rate or Annual Percentage Rate (APR), so you may want to use a free online small business calculator to help understand the true cost before you sign on the dotted line.

About the Author:

Gerri Detweiler has been guiding individuals through the confusing world of finance and credit for 20+ years. She is the author or coauthor of five books, including her most recent, Finance Your Own Business: Get on the Financing Fast Track. Today, Gerri serves as the Education Director for Nav, an online platform that matches small business owners to their best financing options and gives free access to personal and business credit scores.

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