5 Financing Options For Your SMB

Business Expansion

Jacques Famy Jr
Review By Todd Millman

Small to medium-sized businesses (SMBs) rely on small business loans to succeed in their competitive marketplaces. Unfortunately, traditional lending institutions and banks focus heavily on larger enterprises, leaving SMBs empty-handed for their cash flow needs.

However, that doesn't mean small to medium-sized businesses are out of luck, as there are plenty of opportunities in the online marketplace to take advantage of today. Here are some financing options for small business.

Let's Cover Some Basics of Small Business Loans

Your SMB funding can essentially fall into two camps. Here are our basics for funding options for small business.

  1. Debt 
  2. Equity 

Debt financing refers to business loans and occurs whenever a company receives money from a lender for business needs such as working capital, renovations, expansion, real estate, equipment, etc. Some business loans are secured, meaning they require collateral such as assets.

On the other hand, equity financing is where a business provides a percentage of the company in the form of shares for the cash flow they need now.

Before You Get Started On Options For Financing A Business

Diving into the expansive world of SMB financing can be daunting, so before you start researching various options, there are some questions to answer.

1. Why Do You Need It?

This can include the amount your business requires and the reason for the financing solution. It will help if you fully grasp how much capital will put you in a successful position. Additionally, knowing where the cash flow will go can help you plan other areas of expenditures or business needs.

2. When Do You Need It?

If you require immediate cash flow, some financing options may be out of reach as they take a while to get approved. However, some loans or funding solutions take as little as 24 hours to get approved. So, by knowing when you need capital, you can eliminate certain options from your research pool.

3. What's Your Current Financial Situation?

A few requirements are needed to get approved for SMB loans, so knowing your financial standings can help narrow your list. Some of these include:

  • Credit score
  • Time in business
  • Type of business
  • Revenue
  • Tax returns
  • And more

So, now that you have some basics down and know the whats, whens, and whys, let's hop into 5 financial options your small to medium-sized business can take advantage of today.

financing options for SMB

5 Financing Options Your Business Can Rely On

1. SBA Loans

The Small Business Administration (SBA) assists small business owners in growing their companies through various loan opportunities. While the SBA is not a lender, they do offer guarantee programs that mitigate the risk for accredited lenders so that small businesses can receive the funding they need. These are extremely sought-after loans that have low rates and long-term funding options. Three of the most popular forms of SBA loans include:

  • 7(a) Loan Program
  • Small Business Microloan Program
  •  CDC/504 Loan Program

2. Short-Term Business Loans

A short-term business loan is a lump sum of capital offered to a company for various business needs. Many businesses utilize this cash flow for working capital, equipment purchases, expansion, and more.  Short-term loans are far easier to obtain compared to other financing options on this list, as the repayment period is much shorter and the amount is typically less.

Short-Term Loan Breakdown:

  • Rates: Factor rates from 1.09% up to 1.35%
  • Terms: 6 to 18 months in duration (typically 12 months or less)
  • Fees: Origination Fees from 0% to 3%
  • Payments: Weekly, Bi-Weekly, and in some cases daily Monday-Friday
  • Credit Standards: All credit types considered
  • Processing Time: Fast Funding: Same-day funding up to 24 hours

3. Lines of Credit

Business lines of credit are extremely flexible in that a financing option resembles a credit card. Business owners can draw money from an established credit line and pay interest rates on the balance owed. It's a simple, flexible, and revolving solution perfect for seasonal operations or those struggling with unforeseen hurdles.

Lines of Credit Breakdown: 

  • Rates: Depend on the borrower's credit but are typically 6.99% and up
  • Terms: Repayment terms over 12 months
  • Fees: None
  • Payments: Flexible cash when you need it
  • Credit Standards: All types considered

4. Invoice Factoring

For businesses that rely on invoices, outstanding or late payments can significantly impact cash flow. Luckily, invoice financing offers a sound solution and can be a great alternative for those struggling with poor credit histories. You can exchange outstanding invoices for instant cash flow for small processing and factor fees. Invoice financing is a great option for many SMBs that struggle with finding funding.

Invoice Financing Breakdown:

  • Deal size is $100k to $10 million
  • The advance rate is 80%- 85% (can do 90% for staffing and trucking)
  • Pricing depends on the volume
  • Terms can go out 120 days and exceptions to 150 days

5. Merchant Cash Advance

Another sound solution for business owners struggling with credit scores, merchant cash advances is a great way to receive funding fast. Through a merchant cash advance, you can sell a portion of future credit card sales at a discount for instant cash flow.

Merchant Cash Advance Breakdown

  • Rate: 1.10% up to 1.45% Factor Rate (This is not an interest rate)
  • Terms: No term limits estimated payback periods are 6 to 18 months
  • Fees: Typically 1% to 3% Origination Fees
  • Payment: Set percentage of future card volumes
  • Credit Standards: All business credit types, from Poor to Excellent, is considered. Not score is driven.
  • Documents: One-page Application, merchant account processing statements, business bank statements

5 Steps on How to Apply For an SMB Loan

The following 5 steps to apply for a small business loan will guide small businesses through an orderly process in answering all of your questions and provide you a road map to discover what is available, how to prepare, apply, and determine which financing option is best for you. Read the following steps carefully.

Step 1: Why Do You Need to Apply for an SMB Business Loan?

Small business owners searching for loans should always start with the question, Why? The need will definitely play a part in the decision when choosing a loan option. If it’s a large order of machinery or equipment or a business expansion that will require a lot of capital, a long-term solution will be necessary. If it's cash flow or working capital needs, a shorter-term loan may be more suitable for that type of need. Determine the “why” and “how much” before taking additional steps.

Common "Why's" and business needs

  • Working Capital (Cash Flow)
  • Equipment
  • Repairs
  • Marketing
  • Business Expansion
  • Execute Business Plan
  • Real Estate Acquisition
  • Recruitment

Step 2: What Are Your Qualifications/Credit Eligibility Requirements?

6 common areas business lenders/funders review within the loan application in making underwriting and approval decisions include :

  1. Industry/Time in Business: The industry small businesses are in and the length of time of operation may dictate what loan products you will be eligible for.

  2. Credit Score Requirements: What kind of credit score do you need to get a business loan? The Personal credit score of the small business owner (s) involved plays a significant role in the decision-making process. The most common question about credit is “What credit score is needed for a loan?” Some loans require an excellent personal credit score from credit bureaus, while others expect good to fair credit scores. Bad credit is not an automatic disqualifier, in some cases, a small business owner can have bad or subprime personal credit, but options will be limited. The better your personal credit, the more loan options you can choose from. The business credit history and business credit score are derived in different ways. Business credit looks at how you pay your business debts, vendor credit, B2B transactions, and business taxes. Judgments, liens, and litigation can also play a role in an underwriting loan decision. We always suggest you monitor your credit bureaus and improve your personal and business credit history.

  3. Cash Flow: How you manage your small business cash flow places a vital role in your ability to acquire financing. Lenders will look at all business bank accounts from the last 3 to 6 months and evaluate a variety of factors in determining the small business’s ability to manage the cash flow of the business. The business bank operating account is evaluated for many factors that include:

  • # of deposits per month
  • Total monthly deposits
  • Annual revenue
  • What types of deposits and withdraws are being made
  • Average daily balance
  • Minimum daily balance
  • Any late fees, overdrafts, and non-sufficient funds

4. Debt-To-Income Ratio: Lenders will look at the revenue versus any other business loans currently being made to see if the business can take on more debt.

5. Assets: Some business funding products will need to see cash reserves or physical assets like real estate, equipment, or other business assets to secure the financing.

6. Financial Statements: Long-term business loans and some business lines of credit, as well as larger loan amounts, will require the review of financial statements to determine eligibility. Common financial statements that may be reviewed include:

  • Business income tax returns (sometimes personal tax returns as well)
  • Year-to-date profit and loss
  • Year-to-date balance sheet
  • Accounts receivable ledger
  • Accounts payable ledger
  • Business plan

If you can improve your situation in any one of the above six areas, you may want to do some repairs before applying for any business loans to secure loan approval. You don’t need to give up your search if you have issues in any of the above categories if you need money now but understand that these factors will impact products, terms, and rates offered to secure loan approval.

Step 3: What Small-to-Medium Business Funding Options Are Available?

Find the best SMB loan options above.

Step 4: Choosing Who To Work With When You Apply for an SMB Loan

Picking the best Business Loan Originator to help you with the loan application process is important.

The following is a list of the different types of business funding originators

  • Traditional banks (Bank of America, Wells Fargo, Chase, etc.)
  • Credit Unions
  • Small Business Lenders
  • Online Lenders (Fintech)
  • Business Originating Marketplace’s
  • Loan Broker’s
  • Business Loan Officer
  • Long-Term Business Lenders
  • Equipment Financing Companies
  • Invoice Factoring Companies
  • Private Business Lenders
  • Hard Money Business Lenders
  • Commercial Real Estate Lenders

Every financial institution differs in what products and services they offer, so it’s important to ask what type of financial products they offer upfront to see if they can provide you with the best options available in the marketplace.

How to Choose the Best Business Loan Originator

  • Determine the originator’s expertise and knowledge of products
  • Determine if they offer many financing options
  • Ask how quick and efficient the application process
  • Research the originator by looking at reviews and/or ratings from the Better Business Bureau and also Google.
  • When getting an offer from a business financing originator, check to see if they provide the proper disclosures with all terms and conditions. They should also be able to provide you with an agreement for review before signing.

Step 5: How to Get the Best Business Loan from Online Lenders: The Application Process

Once you have chosen your business loan originator and narrowed down what business finance products you want to apply for, it’s time to apply and get your offers. The business finance product selection and depending on the lender, the small business loan application, will dictate what documents are required. Ask your business loan originator what specifically will be needed for your small business loan application. It’s safe to say an application will need to be filled out and signed by all owners participating in the loan application.

Documents requested can range from a one-page application and bank statements to additional items like financial statements, proof of ownership of the business, personal identification, or other documentation to explain certain questions that may arise in the underwriting process depending on the lender.

Discover the Financing Option for Your Small Business

SMBs used to be left behind when it came to financing solutions, but now there are many alternative funding options you can take advantage of today. Lenders are taking the online marketplace by storm, and finding a great partner to help establish, grow, or boost your company's success is only a few clicks away.

Regardless of the loan or financing option you decide on, do your research and weigh each's pros and cons. Moreover, never stop building upon the foundational requirements for obtaining a business loan or funding solution. This includes growing your business credit and maintaining all the financial documentation needed to get approved for SMB financing.

Jacques Famy Jr

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