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Tuesday, May 7, 2024

May is Small Business Month – Here's a cheat sheet

The following article by Chad Otar, CEO of Lending Valley Inc., offers a preview of what's included in our May 13, 2024, issue. The entire issue, which also features articles from Leo Arzumanyan, Elie Y. Katz, Allen Kopelman, Dale S. Laszig and Ken Musante, will go live online early next week:

To honor the work of small businesses, May has been designated in the United States as Small Business Month. Small businesses are the lifeblood of the United States, and this is a wonderful way to highlight their vital contributions and functions to the neighborhoods and societies they serve.

But what makes any company successful is solid capital. In this article, I’ll discuss how small-business owners can get financing to see their dreams materialize. These include loans, lines of credit, grants, crowdfunding, investors and alternative funding options.

Loans

Loans are a popular go-to for small-business owners. It’s great for startups that don’t have enough capital, and it’s excellent for longtime businesses that can prove their value versus risk factor to a bank.

To ensure approval, an applicant should prepare a business plan, five-year financial projections, expense sheets, revenue versus expenditure tabulations, and any other pertinent fiscal information that shows the business is in a position of low risk.

However, even if a bank deems a loan risky, there are other avenues to explore. For instance, the Small Business Administration (SBA) in the United States offers its own loans or can provide a guarantee backing for someone a bank finds risky.

The pitfall here is that loans can be quite stringent in their requirements and tend to take a long time to process. The smallest tax infraction, past bankruptcy or accounts payable delinquencies may cause a bank to reject the loan altogether.

Lines of credit

Getting a business line of credit is a desirable option since it provides flexibility and caps the credit line to an amount of money a borrower can reasonably handle. Upon acceptance, the owner can take as much as needed up to the maximum allowable amount. There’s no requirement to pay for more money than used or needed. And unlike loans, there’s no prepayment penalty.

The borrower can make monthly payments or remit the full balance whenever it’s convenient. So a line of credit is more flexible than a small business loan and usually less expensive than a credit card.

Unfortunately, this option is not ideal for businesses attempting to get off the ground. While terms and conditions are determined by the source of funding, they typically conform to a general set of standards. Business owners must prove continual years of business operation (usually at least three), a personal FICO score in good standing, and the business must have an annual gross revenue of at least $500,000.

Grants

Grants are a way for small businesses to acquire capital without need for repayment, and these usually come from government agencies. They provide assistance to just about any type of business providing a wide range of goods and services. There are grants for women, minorities, biotechnology, art, self-employment and so much more.

The guidelines and rules for grants and how to apply for them vary greatly. Therefore, visiting grants.gov is essential. The website displays a list of all available grants and contests gifting free money to a variety of small businesses. The drawback is these are highly competitive, and nothing is guaranteed. A small-business owner may apply for dozens of grants and never see one cent from them. 

Crowdfunding

Depending on the goods and services a business offers, setting up a crowd-funding page may be an excellent way to acquire needed capital that does not need to be paid back. This is because contributors to. Contributors to crowdfunding campaigns don’t take part ownership of the business and will not receive repayment. Instead, they typically receive some sort of gift or special perk in gratitude for their donation.

This is an excellent option for business owners setting up an animal rescue, creating a documentary or engineering a physical product—anything that serves the purpose of doing good for society at large. However, crowdfunding isn’t necessarily ideal for starting a beauty salon, mechanic’s shop or food truck. The only exception to this would be if such a business provided its services for the social good. For instance, a mechanic’s shop that specializes in hiring military veterans could run a successful crowdfunding campaign.

Investors

Finding an investor is a great way to get essential capital in a relatively quick period of time. The SBA has a host of resources to match investors with small-business borrowers. Investors are usually venture capital firms.

However, there is a steep tradeoff here. Normally, an small-business owner must agree to let the firm have a portion of ownership and give them an active say in the company. This isn’t good for small-business owners who desire complete control over the business or want to have sole say in what happens on a daily basis. However, venture capital firms have vast experience in many fields. Their input can be invaluable.

This type of financial sourcing will provide capital to high-growth companies and will be involve firms that are more willing to take risks that banks won’t touch. But, with higher risks comes higher stakes. It isn’t uncommon for a partnership to fall apart only for the venture capital firm to take up the business in full and run with it.   Alternative funding options 

A merchant cash advance (MCA) is a financial product commonly used by small businesses to obtain funding quickly. Unlike traditional loans, where borrowers repay a fixed amount over time, an MCA involves receiving a lump sum upfront in exchange for a percentage of future credit card sales or daily bank deposits. Essentially, it's an advance on future revenue.

Repayment terms vary, but typically the borrower pays back the advance, plus a fee, through a portion of their daily credit card transactions or bank deposits until the total amount is repaid.

While MCAs offer fast access to cash without requiring collateral or a high credit score, they often come with higher fees and can be more expensive than traditional loans. They can be ideal for businesses in urgent need of capital, but they should be carefully evaluated for their long-term financial implications. MCAs are offered by alternative funding providers with a faster turnaround time than banks can offer.

The following resources were used in researching this article: www.sba.gov, www.smallbusinessfunding.com, www.nerdwallet.com/article/small-business/small-business-grants, www.grants.gov/learn-grantsgrants-101. end of article

Editor's Note: Chad Otar is CEO of Lending Valley Inc. For information about the company, please visit www.lendingvalley.com. To reach Chad, send an email to chad@lendingvalley.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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