It’s a challenging time to be a small business owner. The high inflation rate is leading to high interest rates and a more volatile stock market and economy. Increases in cost of goods and services put greater stress on many businesses who may find they need assistance in accessing additional cashflow now more than ever before.
Businesses experiencing financial hardship may have more difficulty obtaining secondary financing from banks and credit unions — particularly as credit requirements begin to tighten. Fortunately, there are many alternative pathways to borrowing that make it easier to find the right fit.
It is always best to look to the company’s existing bank to help navigate the current challenges as they best know the business. If the bank is unable to provide financing alone, they may recommend options through the Small Business Administration (SBA), which offers various loans, including SBA 7(a), SBA 504, and SBA Express loans. The SBA guarantees a portion of the debt, reducing the lender’s risk and increasing the likelihood of obtaining greater financing at more favorable rates. These loans do carry higher upfront fees and require more paperwork than a typical loan.
Opening a line of credit can also be helpful. It is always a good idea to establish maximum borrowing capacity before it is needed so it is there if the time comes. While lines of credit usually feature variable interest rates, which can be a deterrent during a period of rising interest rates. The major benefit is the flexibility to borrow only what is needed and pay down the balance as able, since interest is only charged on the outstanding amount.
Another traditional option is to refinance business real estate. This is best for business owners who already hold a good amount of equity in their real estate. Refinancing for a longer term — 20 or 25 years — with a cash out payment can provide access to additional funds if necessary. While mortgage rates are higher than in recent history, they are still relatively low compared to years ago.
When commercial and regional banks are unable to help, there are many online lenders to explore. While they often have higher interest rates, their loan requirements tend to be more flexible, giving them the ability to approve loans that a bank or credit union may not. In researching options, make sure to look at the types of loans offered, the eligibility requirements, interest rates and fees, and the speed of application processing and funding.
Outside of loans, other options to generate capital are through grants. There is an incredible number of grants available to small businesses from the government (federal, state, and local) as well as from private organizations. Grants are particularly attractive to small business owners because they don’t need to be repaid; however, this means that they can be very competitive, and often the process of applying for and receiving the grant can be a long one. In seeking grant options, it’s important to thoroughly read and understand eligibility requirements to determine if it is worth the time it takes to apply.
New grants always become available, so be diligent in searching for them. Grants.gov can be a valuable resource, and national or local trade organizations can be helpful in identifying grants that are industry specific. For example, a Tourism Return-to-Work Grant was offered earlier this year for businesses engaged in tourism-related activities such as arts and entertainment, sightseeing, and more.
There also continue to be COVID-19 recovery related stimulus available for qualifying businesses. One to be particularly aware of is the Employee Retention Tax Credit, which can still be applied for wages already incurred between March 2020 and September 2021 by filing amended payroll tax returns for eligible businesses.
Sale of equity
Another option to access additional capital is to sell equity (or shares) of the company. Before taking this route, it is important to understand and be able to demonstrate how much capital is needed, what it will be used for, and how it will impact the business. While these funds do not need to be paid back, the business owner gives up a piece of the company — which could be worth a substantial amount in the future. For this reason, this option should be considered as a last resort unless coupled with another strategic purpose an investor may bring to the table. It is also important to be mindful about not raising more capital than is truly needed.
If this approach is of interest, business owners should work with their CPAs or attorneys to prepare a business valuation and projections before engaging individuals or firms to raise outside capital.
For those who prefer a traditional loan structure but cannot or do not want to work with banks, credit unions, or online lenders, consider whether there are others with which to partner. Who in the business owner’s personal and professional network has the financial means to help? Borrowing from family, friends, and peers has benefits, but can certainly have its drawbacks, too. It is critical to develop clear loan terms and have a plan to pay it back. Business owners also need to ensure they make it worthwhile for their lenders; what will they get in return?
For a small business that has assets — typically accounts receivable, inventory, or equipment — but needs working capital, asset-based lending is another type of alternative financing. The assets can be used as collateral to secure a loan or line of credit. If this is not done through a traditional bank, there are generally higher interest rates and fees (origination fees, audit fees, due diligence fees). However, in these cases, a business owner can usually access more capital through asset-based lending than a traditional loan, as these lenders specialize in industries and structure the loans based on their confidence in recovering the borrowed funds through the collateral, guarantees, etc.
Owning a business—especially a small business—in tough economic times is difficult and finding a financing solution can be stressful. Not every option is right for every business, and there are many factors to consider. But with thorough research and partnership with accounting and financial advisors, it is possible to find a solution that is best for each individual business.
Brian DiGiacco, CPA, is a partner at RDG+Partners, a Rochester-based firm that offers tax, business planning, accounting, auditing, payroll, and wealth management services. For more information, visit www.rdgandpartners.com.