The Complete Guide for Sourcing Reliable Small Business Funding in 2023
Navigating the realm of small business financing is often complicated. Sourcing the right loan product for your company is hardly a simple task, especially when confronted with so many different lending options for which your business may or may not qualify.
In an effort to help streamline your search for small business funding, the team at New Bridge Merchant Capital has assembled this free, extended guide to discuss the pros and cons of several common business loan product. By the end, you should have enough valuable information to make an educated decision about how to approach your current funding requirements.
It’s likely that you’re already familiar with some of these funding options. But even if you’ve been exposed to these business lending solutions before, they’re still worth revisiting since this comprehensive review will address several frequently asked questions about leveraging external business funding.
Before we dive into the specifics of how these financing options work, let’s start by looking at some common questions business owners typically ask before financing their projects.
What do my personal and business credit scores look like?
The vast majority of consumer loan products rely on your personal credit or FICO score for establishing creditworthiness and ability to repay the loan. When, for example, you open an unsecured line of credit, as in a revolving credit card, or take a secured auto loan, the lending institution reports your payment history to the following three major credit bureaus:
- Equifax
- Transunion
- Experian
Most banks and businesses that extend credit convey to the three reporting bureaus your timely payment while penalizing your score if fail to pay within thirty days of your monthly invoice. If you are late an additional thirty days on the account, your credit report will indicate 60 days past due, at which point your FICO score falls even further. This cycle repeats until the creditor finally sells the account to collections.
If you’ve been operating your business for any substantial length of time and have opened a business bank account, you’ll have a business credit score, as well. Your business credit profile serves the same purpose as your personal credit score.
Instead of evaluating your personal payment history, your business score evaluates the status of your business accounts to determine loan eligibility and interest. If you’ve taken out a business line of credit or leveraged invoice factoring or term loans to fund your business in the past, your business credit score aggregates public records, debt utilization, and your’s company’s risk profile to generate a score.
In the US, like your personal FICO score, your business credit score draws from three reporting bureaus. While Equifax and Transunion report business credit history, Experion does not. In its place, lenders rely on Dun and Bradstreet’s decisioning analytics to establish creditworthiness.
Your business and personal credit scores tend to overlap; however, there are a few key differences worth mentioning. While personal credit scores range from anywhere between 300 and 800, your business credit rates you on a scale of 1 to 100. Under either scoring model, the higher scores indicate a more favorable credit profile. Most lenders look for a minimum of 680 for a personal FICO and at least a 75 on your business score before dispersing funds.
Will the approval process involve customers and supply chain partners?
The answer to this question depends on the financing type. Take invoice factoring, for instance, a loan product in which you sell your outstanding invoices to the creditor in exchange for funding. The lender grants the financing based on your unpaid invoices.
Under this business loan program, the approval process will likely involve contact with your buyers. Of course, on the downside, you’re introducing a third party in your customer relationship. Not all business owners feel comfortable with this dynamic -especially since your creditor collects the invoice payments directly from the buyer.
Alternative, short-term working-capital solutions like invoice financing give businesses an effective means of quickly accessing the funds they need to cover their daily operating expenses.
Ultimately, the decision is up to the business owner to involve their customers with their business funding. Despite this element of customer involvement, loan programs like invoice financing can be a reliable way to access cash for the services you’ve already delivered.
How much business funding do I need?
As you engage the business loan approval process, it’s entirely plausible that the lender could agree to grant you more funds than you actually need. This might sound like a desirable problem for businesses, but remember to keep the precise objectives of the financing in focus to avoid drawing too many funds, as this only increases your borrowing costs.
Unless you’re taking out a revolving business line of credit, you’ll only end up paying interest on the funds you fail to use. The additional interest expenses of borrowing too much can quickly add up, impacting your bottom line and making it a challenge to remain profitable and access financing in the future.
What are borrowing costs?
While borrowing to drive business growth comes with countless benefits, this is hardly a good reason to ignore borrowing costs. No matter who you borrow from, you want to ensure you find the most attractive business loan offer.
Make sure to origination fees, prepayment penalties, subscription fees, and any maintenance fees between prospective lenders. This way, you won’t overpay for your loan. The extra fees you’re looking for are any costs -hidden or expressly stated- that are above and beyond the interest payments made.
All fees should be present on your loan disclosure sheet. Beware closing “estimates” or incomplete loan fee disclosures. You’re likely to discover the costs to originate your business will be considerably higher when it comes to sign for the funding.
How does small business funding work?
Small business loans are given to businesses with well-documented cash flows to provide the additional working capital needed to purchase real estate, new equipment, inventory, and day-to-day operating expenses after a financial shortfall.
The US Small Business Administration defines a small business as any organization with 500 employees or fewer. Assuming you meet this criterion and qualify for small business funding, the creditor will proceed to review your qualifications for your preferred loan product.
Like personal, home, and auto loans, every business loan program comes with its own unique qualifying requirements that vary from creditor to creditor. As you begin the process of applying for business funding, you’ll invariably encounter several common business funding options.
Now, let’s take a detailed look at these business lending options in more detail below:
Traditional bank financing
Before the 2008 global financial crisis, traditional banks handled the lion’s share of the national business funding. In previous decades, as a business owner, you were likely to meet with an agent in person at a local branch where you disclose your credit history and financial details before signing the final loan documents and receiving the funding you need to cover your operating costs and continue driving your strategic growth objectives.
Banks have since tightened their credit requirements across the board, but this is especially true concerning newer companies. Aside from the Great Recession of ‘08, the COVID-19 pandemic brought several significant changes to the traditional lending environment. Business loan approvals declined by as much as half by the start of 2021, just one year into the global health crisis.
The year 2020 saw less than 14% of business loan applications approved. Businesses receiving during this time were well-established with strong financials and impeccable business and personal credit ratings. Even if you meet these stringent requirements and are fortunate enough to get through all the paperwork and the dozens of hoops you need to jump through during the loan approval process, you could wait months before receiving funding.
Traditional bank financing offers a few benefits worth noting, however. Assuming you can spare the additional loan processing time, conventional bank financing typically provides the most competitive interest rates and lowest borrower costs.
Generally speaking, traditional lenders can provide businesses with more substantial loan amounts on a fixed monthly payment schedule. They also prefer to build long-term relationships with their customers with their business banking customers.
Online business lenders and term loans
Traditional banks usually offer rate and term financing, but you can also access these same loan products from online business lenders. Online lending laws vary by state. Depending on your location and credit situation, web-based alternative business financiers can present viable business borrowing solutions.
As business loan approvals at traditional banks approved 13% of all business loans during the pandemic, approval rates for online-based alternative creditors granted loans to nearly a quarter of all applicants by the end of 2020.
Online creditors can typically process your file quicker and release the funds with fewer overall requirements than conventional banks and credit unions. Not all online lenders offer term loans, however. If you are searching for a term loan, New Bridge Merchant Capital can provide you with multiple options, and we work on your behalf to ensure you find the right loan product for your business.
When you take out a term business loan, the creditor releases the funding in one lump sum, typically at a fixed rate of interest, while you repay the balance over scheduled installments over the life of the loan. Business term loans can span anywhere from one to five years, with one year being the most common term length.
The primary advantage of business term loans, whether from a traditional bank or online lender, is that they usually fund higher loan amounts than the other funding options, which we’ll touch on in further detail below. Business owners prefer term loans for their larger, one-time investments that are too hefty to pay off in the immediate term.
Other benefits include:
- A fixed amortization schedule over one to five years
- Financing for a diverse range of benefits and objectives
- Establishes business credit
- May exclude prepayment penalties
- Enhances future funding eligibility
However, not all term loans waive prepayment penalties, and most require higher credit ratings for approval. Borrowing costs for loan terms spanning one to two years can be steep, and creditors often require a personal guarantee or collateral assets before granting the loan. Like most loans, expect to pay origination and other fees at closing. Always remember to compare these costs against other offers.
Business lines of credit
Business lines of credit are like unsecured consumer credit cards or home equity lines of credit (HELOC). They provide you with a revolving line of capital that you can access when you need it. Unlike term loans, lines of credit give the ability to the outstanding balance down and replenish your existing credit for future use.
For illustration purposes, let’s assume you’re taking out an $80,000 business line of credit. Once approved, unlike a term loan, which is dispersed in one lump sum and paid back over a specified time, you’re entitled to draw funds up $80,000. Likewise, once you draw from your business line of credit, there is no amortization schedule or specified maturity date. You just have to make the minimum monthly payment.
So, in other words, like consumer credit cards, a business line of credit requires companies to pay interest on any outstanding balance they carry. Business owners may qualify for lines of credit with less-than-perfect credit, but they should expect to pay higher interest rates. Business lines of credit lack a fixed repayment schedule, making the loan interest more expensive than term loans, even for those with A credit.
Other details to keep an eye on when applying for a business line of credit are the fees associated with opening and maintaining the line. While you’ll almost always pay interest on the funds you withdraw, unlike term loans. In most cases, your personal and business credit ratings determine how much you can draw from your business line of credit.
In the unlikely event that you can’t repay the balance, depending on whether or not the financing was collateralized, a defaulted credit line could place your business at substantial risk. Like revolving consumer trade lines, it is easy to run up a high balance that can be expensive to repay and take a substantial time to reduce.
Lines of credit help you save on borrowing costs, however. You only pay interest on the funds you use, and you don’t have to originate a new loan to access working capital when you need it.
Merchant cash advances
Businesses that deal substantially in credit card transactions benefit from merchant cash advances the most. Lenders that offer merchant cash advances provide funding to companies in exchange for their future card receipts. Let’s assume the creditor decides to advance you $100,000. The lender will then request a percentage of your monthly credit card sales until you repay the original loan balance.
Typically, merchant cash advances serve as short-term borrowing solutions, and the repayment period rarely exceeds 12 months. Generally speaking, although terms and conditions can vary from bank to bank, the lending institution will aim to recoup around 10% of your monthly credit card sales until as payments for the loan.
The principal upside to merchant cash financing is the short time it takes to process your loan application and disperse the funds. You’ll find this financing option includes less paperwork, there are no collateral requirements, and you can receive the funds in as little as one week. The amount you pay every month is determined by your credit card purchases for the month, so there is no fixed repayment schedule.
High annual percentage interest rates and borrowing costs are among the main drawbacks to merchant cash advances. Funding times for these types of loans are fast, however, and the approval requirements are lax when compared with the funding options listed above.
Merchant cash advances offer a great tool for covering your expenses quickly after a financial shortfall. But keep in mind the repayment period is unfixed, and you’ll have to deal with reduced cash flows until you repay the original loan balance in full.
Small Business Administration loans
Small Business Administration (SBA) are similar to Federal Housing Authority (FHA) loans in the sense that they’re government back and insured financial instruments. Since the government guarantees the loans and they don’t hold all the risk, lenders are usually amenable to approving businesses with riskier credit profiles, or they may consider funding smaller businesses that lack an extensive professional track, as long as they have two years of seasoning.
SBA loans can be an effective funding solution for business owners with less-than-perfect credit or no credit history at all, but there are a few caveats to SBA loans worth mentioning.
The cost to take out an SBA loan is usually more competitive than the alternatives. The interest rates are low, and the repayment terms are longer than other business financing options. Unfortunately, the SBA loan application process is rather involved, and, again, the loan requires you to have been in business for at least two years.
When you apply for an SBA loan, you should expect several weeks to pass before the final approval. Under most circumstances, the SBA requires you to pledge at least some collateral in exchange for the funds.
- Download the SBA National Resource Guide
- Download Gloucester County, NJ’s Small Business Guide (PDF)
Business grants
Business owners can also access several business grant programs. After doing a bit of legwork, you shouldn’t have too much trouble finding grant money to fund your business if the requirements.
Federal, state, and private agents are potential sources for business grant funds. The best part about grants is they’re not loans, and there’s no requirement to pay them back as long you fulfill the conditions of the grant.
Downloads
- Gloucester County Small Business Assistance Program
- The Cultivating Access, Rights & Equity (CARE) Grant Program
- NJEDA Small Business Improvement Grant Program
- Stronger NJ Business Grants
Invoice financing
We touched upon invoice financing in a prior section. But we didn’t want to leave it off the list. To reiterate, lenders grant funding to small businesses that demonstrate unpaid invoices sufficient enough to borrow against their receivables.
If you’re interested in pursuing invoice financing to fund your company, or any of the business financing options discussed above, consider partnering with New Bridge Merchant Capital.
We’re an alternative business financier offering smaller companies like yours fast and secure funding solutions that ensure you have enough working capital on hand to cover your operating expenses and drive organizational growth.
Get started with New Bridge Merchant Capital by submitting your details online. Or, to get a better idea of what you qualify for, connect with one of our senior business finance consultants by phone now by dialing 844-228-0593.
