What You Need to Know About Small Business Financing

Even after small businesses get past the initial hurdle of start-up funding, chances are they’ll need it again later when they aspire to grow. Your small business clients might, or perhaps already have, turn to you for advice on funding for maintaining or expanding their businesses. Depending on their situation—short- or long-term, why they need it, how strong their qualifications—several sources of business financing are available, but choosing the wrong one could end up doing them more harm than good.

Read on for information to help you understand some of the more common types of financing your small business clients can consider, along with special financing resources they may not know about. 

State Small Business Credit Initiative

Woodard has been sharing information about the State Small Business Credit Initiative (SSBCI) as it has evolved. SSBCI was first funded through the Small Business Jobs Act of 2010. The American Rescue Plan Act (March 2021) put $10 billion into funding SSBCI as a way to help small businesses just starting out when the pandemic hit and others that needed to rethink their business models. Funding included:

Loan and investment programs for existing and emerging small businesses
Technical help for small firms seeking SSBCI financing and other government small business programs

SSBCI is giving cash to states, territories, the District of Columbia, and Tribal Governments on a rolling basis as proposed programs are approved by Treasury.  The first three round of approved programs were announced this past summer. Check here to see which states’ programs have been approved.

Term loans

As an accountant or bookkeeper, you most likely already have clients who are repaying term loans. Most small businesses turn to term loans because they’re familiar, tend to have favorable rates, help build credit, and the lump sum can be used for a variety of business needs.

Most businesses with favorable credit can secure an affordable term loan from banks and credit unions. Online lenders are another option, and they tend to have a faster and more straightforward approval process, but rates may be higher.

Small business owners should know that their personal credit could affect their ability to get a business term loan.

SBA loans

Another affordable way small businesses can obtain business financing is through loans backed by the U.S. Small Business Administration (SBA). Since the federal government guarantees a portion of the loan, the risk is reduced for the lenders, and they’re more willing to lend to borrowers who might otherwise be considered risky.

These loans don’t come directly from the government—your client will need to apply through an SBA-approved lender. Borrowers who qualify will find several advantages, such as competitive rates, repayment terms for as long as 30 years, and low down payment requirements for certain borrowers. The drawbacks are that the approval and funding process can be slow, and the qualifications are fairly strict.

Other common types of business financing

Besides the more traditional types of loans for a business’s general needs, other forms of financing exist for certain situations your client’s business might be in. But the terms, forms of collateral, APR, and your client’s risk appetite should be carefully considered.

Financing Type	How It Works	Best For	Be Aware . . .
Business Lines of Credit	Short-term loans that let the business access the cash it needs as needed up to the limit of the loan. Interest is paid on the advance amount from the time it’s advanced until it’s paid back.	When the business isn’t sure how much money they’ll need for inventory purchases, operating costs, etc. Generally doesn’t require collateral.	Rates vary dramatically (from 5-36%) so these are best for businesses with an excellent credit score.
Equipment Loans	Allows the business to purchase equipment and finance through either a bank, the manufacturer, or equipment financing companies.	Financing new equipment, particularly large, expensive equipment. Equipment serves as collateral, so rates are usually reasonable.	Be sure the equipment won’t be obsolete by the time it’s paid for. Otherwise a term loan might make more sense.
Invoice Factoring and Invoice Financing	Provides short-term financing by borrowing against outstanding invoices. Factoring gives the lender control over collecting the invoice payments; financing leaves the borrower to collect invoice payments.	Business-to-business businesses who struggle to receive on-time payments and who need cash quickly to improve cash flow, pay employees and suppliers, etc.	While fast and often credit flexible, can be expensive and risky.
Merchant Cash Advances	Like invoice factoring, but it uses future credit card sales as collateral rather than unpaid invoices. Business receives a lump sum upfront and repays the advance with a percentage of the business’s future sales.	Situations where cash is needed quickly, and the business owner is confident in future sales.	Quick to obtain but very high APR.
Vendor Financing (also known as Trade Credit)	Credit extended to the business from the vendor to buy supplies so that they can buy now and pay later. Sometimes equity in the borrower’s business is used to repay the loan.	When the business needs a significant amount of cash for equipment or supplies but can’t get financing from traditional sources.	Interest rates can be high. and the transaction should be entered into with caution.

As a trusted advisor who understands the businesses of your clients, it’s only natural for them to seek your advice on how to finance their growth goals and other needs for capital. Of course, you’ll have to direct your client to a lending professional early in the discussion, but having some knowledge on the topic can help them start their decision process. This Hubspot article offers some good information to help them prepare for a discussion with a lender.