Financing Strategies for Small Business Ownership

You've been dreaming about it, likely for years, and you're ready to make it happen. It's right there in front of you—you've decided what you want to do and who you want to serve, and you have the skills and determination to make the leap into small business ownership. It's an exciting time!

As you likely know, business ownership also comes with its fair share of hurdles, especially in the beginning. Things like lack of brand awareness, struggling to find customers, balancing quality and growth, and onboarding a top-notch team. But one of the biggest challenges small business owners face when they start out is funding (or lack thereof).

Without enough money, it can be next to impossible to get your small business off the ground (or keep an already running engine going). Luckily, there are many financing options for small business owners like you to help turn those dreams into reality.

When you finance your small business, it gives you a foundation to stand on while you gain customers, form revenue streams, and establish your operations. That means you won't have to wait to turn a profit in order to cover costs.

How do you get started, though? We'll walk you through the various financing options available to you and give you guidance on how to choose the best solution for your unique needs. Plus, you'll learn all about careful planning, financial management, and perseverance in your pursuit of small business ownership.

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Understanding your financing options.

There's a wide world of financing solutions out there, so it can be overwhelming at first. Let's talk about the basics of each of your options and cover some pros and cons to get you started.

Traditional bank loans

Banks, credit unions, and other financial institutions offer several types of small business loans. The eligibility requirements, loan terms, interest rates, fees, and the amount of each loan will vary depending on the bank you use. You can find small business loan options at any of the major banks (Wells Fargo, Bank of America, etc.) as well as at most smaller local banks and credit unions. These are the most common loans offered by banks:

• Business lines of credit – these function similarly to a credit card in that you are given a determined credit limit and can access those funds at any time in any amount. As you pay back the outstanding balance, your available credit replenishes, and you only pay interest on withdrawn funds.
• Term loans – A term loan is a lump sum of cash that is required to be paid back within an established repayment term, and often require some form of collateral and a down payment.
• Equipment loans – This financing is used to purchase business-related equipment, be it manufacturing equipment, restaurant appliances, or vehicles. Equipment loans also have a fixed repayment term and include interest.
• Commercial real estate loans – CRE loans are made for small businesses looking to purchase new real estate, expand, or renovate. CRE is any income-producing real estate used for business purposes, like offices and retail stores.

Usually traditional bank loans have the lowest interest rates and most favorable terms on their business loans which makes them attractive to small business owners like you.

But keep in mind that it can be difficult to qualify for bank loans because you take on 100% of the risk of not being able to pay back the loan. This causes lenders to enforce eligibility requirements such as being in business for at least two years, having a minimum annual revenue, and a strong business credit history.

SBA loans

The U.S. Small Business Administration (SBA) is a federal agency that provides support to entrepreneurs and small businesses. They have a wide network of partnerships with banks, credit unions, and other lenders, and the SBA provides a government-backed guarantee on part of your loan (up to 90%) when you secure a loan through them.

It can often be easier to qualify for a loan because the guarantee by the SBA means less risk for the lender. There still are some eligibility requirements for SBA loans, including the size of your business, if you are officially registered and for-profit, and you have an adequate credit history.

There are three primary SBA loan types: SBA 7(a), 504, and microloans.

• SBA 7(a) loans are issued by a private lender and often have long repayment terms and low interest rates. You can also use them for a variety of business purposes like capital, expansion, or equipment.
• 504 loans provide long-term, fixed rate financing for major fixed assets. You can’t use 504 loans for working capital.
• Microloans are made for small business owners who don’t qualify for traditional financing. It is a small-dollar loan available in amounts less than $50,000.

Alternative lenders

There are alternative lending options through nonbank lenders who either raise their own funds and lend to small businesses directly, connect you with investors, or partner with banks.

Alternative lenders generally operate fully online and use technology-based systems to underwrite, price, and issue business loans. This means that you can get access to funds much faster (sometimes within 24 hours), but you will also likely run into much steeper interest rates and shorter repayment periods in exchange for the convenience.

Pro tip: alternative lenders are regulated by a combo of federal and state guidelines as well as self-regulation. So always be sure to get straight answers from any alternative lenders and establish crystal-clear agreement terms.

Preparing your business for financing.

Think you know a lending option that sounds right for you? Great! Before you move forward, you need to make sure your business is in order before financing can commence. If you are just starting out, you first should create a solid business plan. This is the foundation of your business and a roadmap for how to structure things.

Your business plan should meet your unique needs – two common types of business plans are traditional business plans and lean startup plans. They each have their own elements, so feel free to pick and choose the sections that are right for you.

Financial projections are also part of your business plan. If you don’t make an educated projection about your business’s revenues and expenses, you’ll be in the dark when it comes to financial decision making including financing. Short-term projections are usually month to month in your first year of business, whereas mid-term projections cover three years down the road. 

Financial projections allow you to forecast your growth and success and make better, more informed decisions.

In order to get lending options approved for your small business, you need to have a strong credit profile as well. Credit bureaus use your business’s payment information, the size of your business, your credit utilization ratio, and risk of failure in determining your score. 

But if you’re brand new to small business, you’ll need to establish some credit first. You can do so by registering as a legal entity like an LLC or corporation, which separates your business from your personal credit reports. You’ll also want to open accounts with suppliers and vendors and business credit cards to demonstrate your ability to pay back what you owe.

Last but certainly not least is gathering all the necessary documentation you need to be financing-ready. Financial statements, tax returns, income statements and balance sheets, and so on. This will be your handy-dandy notebook of information that proves you are qualified for a loan. And if you are applying for a loan, like a term loan, that requires some form of collateral, you’ll need to have that at the ready as well.

Navigating the financing process.

You’ll want to make sure you are doing your due diligence to research all the things that come with financing and understanding the way different lenders compare to each other. When choosing a plan, consider these key factors:

• Interest rates and associated fees
• Repayment terms, term length, and flexibility
• If the amount of the loan is suitable for your business (don’t commit to a number you can’t repay)

When you’re ready to groove, you’ll have to prepare a loan application, which requires information like your pay stubs, W-2 forms, federal tax return, bank statements, and other necessary documentation. Make sure you have all of this gathered and organized to make the application and negotiation process much smoother. 

Speaking of negotiation, it can be tricky but it is possible to negotiate your loan terms with a banker or lending agent to make your loan less restrictive. When you review your loan terms, identify highest priorities on the list of restrictions required by the lender so there may be some wiggle room on your lower priorities.

Turn your small business ownership dreams into reality.

Time to close the deal! Now you have everything you need to know to understand your financing options, choose a loan option and lender, and make the financing process smooth sailing. No more waiting around for opportunities to come to you – it’s time to jump in feet first and explore your financing options to make a splash in small business ownership. 

When you’ve got financing under your belt and you’re ready to take the next step in making running a business easier and more efficient, we’re here to help. The Homebase everything app for hourly teams is an all-in-one tool for automating and managing business tasks like payroll, scheduling, HR, and hiring so you can go back to making your dreams a reality.

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