Typically small businesses will turn to banks for funding. When banks slow on lending, there are alternative financing options like online loans or merchant cash advance loans. Where do small businesses turn for funding when both banks and online loans are not being approved? What are the current small business funding options?
Small Business Bank Loans
The most recommended way of funding a small business is through a small business loan from a bank. This is because banks can offer inexpensive loans with favorable repayment terms for entrepreneurs. Typically during recessions, big banks are less likely to lend to small businesses due to the associated higher risk. Small businesses disproportionately get hit the hardest during economic downturns, so banks will rely on strict approval criteria in order to protect their own interests. This isn’t to say that a bank loan for small businesses will be impossible, but it will be difficult for first-time entrepreneurs, business owners with poor personal or business credit, or a business that has depressed revenue. If you are able to access bank financing, make sure your financing needs are met. If not, you may need to seek supplementary financing like credit cards, accounts receivable funding, or equipment financing.
Small Business Stimulus Funding
It is unlikely another government stimulus will be approved in the coming months. There are still programs from the first stimulus that could help finance your business. The Paycheck Protection Program or PPP is a loan program that is up to 100% forgivable. This means if you meet the conditions of loan forgiveness, you do not repay the loan amount. It requires an application through an SBA lender such as your bank, then SBA approval as well. If you have already taken advantage of this loan program, you are unable to seek more financing through it.
The Small Business Administration also offers Economic Injury Disaster Loans or EIDLs. These are loans aimed at small businesses that have lower, fixed rates with longer repayment conditions. It could be tricky to qualify and receive the full financing that you are seeking, but it is a lower cost loan that could be crucial to keeping your business safe.
Some alternative financing options are online loans, merchant cash advances, equipment financing, purchase order funding, or invoice factoring. Online loans are typically more expensive than bank loans, but they are quicker to receive and slightly easier to qualify. This funding has slowed due to the algorithms many online lenders use to determine approvals. The drop in revenue that small business saw due to the pandemic and recession has thrown a wrench in this. Merchant cash advance companies are useful for some industries, but be sure that you are not putting a band-aid on a bullet wound. The lump sum of money you receive quickly comes at a high cost with frequent repayments that could hurt your cash flow.
PO Funding offers cash upfront to businesses that need more capital to fulfill larger orders. Equipment financing is great for a lot of small business owners that want to meet larger business demand as well. Invoice factoring is not a loan, but it offers funding to improve business cash flow. Factoring services are more expensive than a bank but less expensive than merchant cash advances and some online loans. The approval decisions are fast, and the funding line is flexible. Many business owners use factoring facilities to accelerate their cash flow in order to meet payment obligations, take on new business, or stabilize their cash flow cycle and have cash on hand for unexpected business costs.