The good news is that 2021’s financing environment is strong. Capital is readily available, and the economy is doing pretty well. Interest rates also remain at historic lows, even though it’s likely they’ll rise in the coming years. This is why it’s good to take advantage of financing opportunities while they’re available to improve your cash flow. Here are a few moves you can make this year.
1. Get an SBA Loan
The Small Business Administration has a number of loan programs available for small businesses — generally those with less than 500 employees — who otherwise wouldn’t be eligible for a traditional bank loan. These loans are issued by SBA lenders, which are generally banks and financing agencies authorized by the Administration. SBA loans still require that you provide all the documentation for a typical loan, such as tax returns, projections and a business plan. Loan terms, interest and maturities are similar to regular bank loans. But SBA loans are (almost) fully guaranteed by the federal government, so a bank’s risk is significantly reduced in case of default.
2. Apply for a Government Grant
The U.S. government is huge, and most departments have grant programs to fund research, development and other activities that will benefit their objectives. You can find a list of grants online. Both the U.S. government and many states also specifically allocate funds to minority businesses. Usually, grants require a commitment to hiring people, but not all the time. Remember: Grants don’t need to be paid back. And many small businesses use them as a stepping stone towards additional work with the government.
3. Take a Look at Online Lenders
These loans — offered by firms such as Kabbage — tend to be more expensive, but don’t let that put you off. Online lending is a multi-billion dollar industry because of the service it provides to small businesses — needed capital for when other capital isn’t available. Approvals are very quick, usually within 24 hours. And by keeping these costs short term, many business owners can justify the return on investment.
4. Leverage Merchant Advances
Like online lending, merchant advances — which are provided by popular point of sale services like Square, PayPal and QuickBooks — can be pricy. But also like online loans, the cash is available quickly (these platforms are tied directly into a company’s operations) and can be paid back immediately through receipts.
5. Max Out Your Credit Card
Credit cards come with high interest rates. But not if you pay them off that month. So this type of financing is a great, short-term way to raise cash for a specific purchase, particularly if you’ve got the ability to pay it off or arrange more affordable longer-term financing. Consider using services like Plastiq, which enables you to pay any vendor with your credit card, regardless of whether they accept credit cards. Using a credit card can also help you make larger purchases, international purchases and accumulate points and cash back advantages.
6. Look Into Factoring
Factoring has been around for a while, but newer platforms — like BlueVine — allow small businesses quick access to funds thanks to cloud-based technologies that integrate their system with accounting and banking platforms. Some of my clients choose to “factor” (get paid in advance) for a larger invoice or one with a customer known to pay slowly, like the government or an international party. The fees charged are worth the avoidance of hassle and cash flow headaches while payment is expected.
All of the above are great ways to finance your business. But let’s also address a few not-so-great ways.
For example, I don’t like it when people lean on their vendors for financing by delaying payments. That’s a bad idea and a poor way to build relationships with what can be one of your most valuable partners. Treat your supplier well. Pay them on time. They’ll reciprocate when you need it.
I’m also not a fan of getting bank loans secured by personal assets, like a house. People do it all the time, and I recognize that it’s certainly an option. But I warn my clients to limit this exposure and not put too much at risk. Keep your business and personal assets separate. If your business fails, you’ll still need somewhere to sleep.
Finally, try to avoid getting a loan from a friend or a family member. This tends to be the most popular way startups get their financing. Plus, it’s easier to negotiate new terms and delay payback when it’s not a corporate collector. When it all works, it’s great. But when it doesn’t — watch out. And keep that carving knife out of your cousin’s reach next Thanksgiving!
So yes, the financing environment is good, and it’s a good time to take advantage of low rates and get your balance sheet in order. But also remember: If you don’t need to borrow, then don’t. Sure, rates are low. But why pay anything if you don’t need to?
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