Small Business Funding

Small business funding is a constant concern for millions of American businesses. When credit dries up, they are hit disproportionately hard. This article attempts to address some of these financing concerns and offer suggestions on sources of capital including:

  • Small Business Funding Challenges
  • Small Business Factoring
  • Loans from Uncle Sam

Small Business Funding Challenges

Small businesses face an unusual set of funding challenges.  They often have difficulty accessing working capital loans or a business line of credit. This is due to a number of reasons, including a short period in business, the absence of financial statements or a lack of profitability.

Small business’ financial condition is much more dependent on  cash flow than larger businesses. Case in point- a financial metric that is tracked for new, fast-growing companies is  cash burn rate, essentially the amount of time remaining until a small business runs out of cash. Without the safety of a credit facility, if cash flow dries up, businesses go under.

Up to 82% of startups and small business failures are because of poor cash flow management.1

Since many owners have a significant portion of their personal net worth invested in the business they  muster whatever resources necessary to  to solve the problem. It could mean not paying yourself a salary this month (again). When the business experiences cash flow problems, it jeopardizes a variety of stakeholders. There could be missed payroll for employees that have been with the company for decades.

Some invoiced customers clearly take advantage of small businesses scale and negotiating position. They will often wait as long as possible when making payment. And why not? While they drag out repayment, they’re receiving an interest-free loan. This helps their cash flow needs, but harms yours.  As a small business, you don’t have a lot of negotiating power in terms of payment terms-you’re just lucky to have the account. So what can you do? There are a few options for small business funding that can be capitalized upon. Invoice or accounts receivable factoring is one funding option that many businesses are turning to.

Small Business Factoring

Invoice factoring is an effective cash management tool for any small business owner. Factoring levels the playing field with customers that take their time with payment. Best of all, small business factoring allows businesses to raise money without incurring debt.

Today, an increasing source of small business funding is invoice factoring. Consequently, more factoring companies are realizing this and are catering to these customers. Factoring receivables used to be for larger companies with monthly invoices of over $50,000, but that has changed. Some factors offer no monthly minimums (sales volume) to appeal to small business customers including freelancers. The small business may receive immediate funding from the factor in as little as one day, (possibly in hours). Generally its business-to-business invoices that are eligible.

Remember, invoice factoring involves selling your invoices (a.k.a. bills or accounts receivable) to an invoice factoring at a discount. The factor provides immediate funding through an advance amount, dependent on the credit profile of the invoiced customers. Whenever the account debtor pays the invoice the factoring company, the remaining balance gets returned to the business minus the factoring fee,often 2%. It should be noted that factoring fees for small businesses may be higher-perhaps 3-4%.

Financing from Uncle Sam: SBA Loans

SBA loans are usually the cheapest form of small business funding. Provided through the U.S. government’s Small Business Administration, these working capital loans assist American small businesses by helping them access shorter-term funding needs. The government agency doesn’t actually extend the working capital loans themselves, they partner with private financial institutions and typically just guarantee the loans. Although,on some occasions they will make direct loans, often to minority small businesses.

The loans are not designed to be long-term financing needs, such as building a plant or expansion. Rather, they are for shorter term needs (one year’s time or less) to meet working capital needs such as meeting payroll or  buying seasonal inventory.

But there are reasons why SBA loans offer such a low interest rate for business borrowers. The requirements to get a small business loan are tough. But if you have been in business for at least 2 years and are a medical related companies, there’s an opportunity to qualify. Here are just a few examples of businesses and their eligibility with respect to SBA 7(a) loans.

Requirements for SBA Loans:

  • Be “for-profit”
  • Actually be a small business. For example, a freight trucking company may qualify for a loan if it has less than $27.5 million in total revenue annually (refer to full SBA size standards).2
  • Demonstrate a need for the loan proceeds and use them for a ‘sound business purpose’.
  • Use alternative financial resources including personal capital before applying.

Some Industries that Qualify for an SBA 7(a) Loan

  • Farms and Agricultural businesses
  • Privately-owned medical facilities (hospitals, clinics, outpatient facilities and labs).

Who Does Not Qualify for an SBA 7(a) loan?

  • ‘Speculative’ businesses (oil and gas companies)
  • Gambling companies (even legalized gambling) if it comprises over a-third of annual revenue.
  • Financial lenders such as banks, leasing companies and factors (invoice factoring companies).

 

 

https://www.entrepreneur.com/article/249020

http://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=7780ee089107f59ef3f78b938e2282b7&r=PART&n=13y1.0.1.1.17#se13.1.121_1104

https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf