What is Small Business Financing?

small business

When I hear the words finance or accounting, a little cold shiver runs down my spine. I am not a finance person, and I applaud anyone who loves to crunch numbers. I do, however, love learning, so take this article as an educational resource. Learning is fun!

One of the most challenging things promotional products distributors face as a small business is securing financing to start, sustain, or expand their ventures.

In this article, we’ll dive into small business financing, including traditional and alternative options, and provide insights for a general understanding of how all the numbers work together!

What is Small Business Financing?

Small business financing refers to the various methods and sources through which entrepreneurs acquire capital to fund their business operations. From the initial stages of launching a startup to managing day-to-day expenses and pursuing growth opportunities, adequate financing is crucial for sustained success.


Small Businesses Facing Financial Challenges

Small businesses are facing significant financial challenges since pre-pandemic, circa 2019.

According to the Federal Reserve Banks’ Small Business Credit Survey, a staggering 59% of small businesses reported being in fair or poor financial condition. And 85% of small businesses experiencing financial difficulties in 2021 alone.

This means more and more small businesses are applying for business loans to stay afloat during difficult times.

Types of Small Business Financing:

  1. Traditional Bank Loans: Bank loans are one of the most common forms of financing for small businesses. These loans typically have fixed or variable interest rates and structured repayment terms. However, securing a bank loan may require a strong credit history, collateral, and a detailed business plan.
  2. Small Business Administration (SBA) Loans: The U.S. Small Business Administration offers several loan programs to support small businesses, including the popular 7(a) loan program and the CDC/504 loan program. SBA loans often feature competitive interest rates and longer repayment periods, making them attractive options for entrepreneurs who may not qualify for traditional bank loans.
  3. Microloans: Microloans are small-scale loans provided by nonprofit organizations, community development financial institutions (CDFIs), and online lenders. These loans are typically less stringent regarding eligibility criteria and can be used for various business purposes, such as purchasing equipment, inventory, or working capital.
  4. Business Lines of Credit: A business line of credit gives entrepreneurs access to a predetermined amount of funds they can draw upon as needed. Unlike traditional loans, borrowers only pay interest on their funds, making it a flexible financing option for managing short-term cash flow needs and unforeseen expenses.
  5. Venture Capital and Angel Investors: For high-growth startups with significant potential, venture capital firms and angel investors provide equity financing in exchange for ownership stakes in the company. While venture capital can inject substantial capital into a business and provide strategic guidance, it often involves giving up partial control and ownership.
  6. Crowdfunding: Crowdfunding platforms enable entrepreneurs to raise capital from many individuals who contribute small amounts of money to support a business idea or project. Crowdfunding can effectively validate market demand, generate pre-sales, and build a community around your brand.
  7. Peer-to-Peer Lending (P2P): Peer-to-peer lending platforms connect borrowers directly with individual investors willing to fund their loan requests. P2P lending offers borrowers competitive interest rates and streamlined application processes, making it an attractive alternative to traditional banking institutions.
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Minimum Credit Score: A lender typically checks both your business and personal credit scores. The type of loan determines the minimum score required.

Annual Revenue: Some lenders may want to see a minimum amount of annual business revenue before eligibility for financing.

Time in Business: Businesses that have been in operation for longer have a greater chance of loan approval. In general, lenders typically require a business to be in operation for at least one to two years.

Debt Ratio: Lenders may also review your debt-to-income (DTI) and debt-service coverage ratio (DSCR).

Collateral: With secured loans, lenders require you to pledge collateral—something of value, such as accounts receivable or real estate—that they can seize if you fail to repay the loan.

Personal Guarantee: Some lenders and loan types require a personal guarantee, which protects the lender in the case of a default.

Source: Forbes

If you were ever curious about small business financing, hopefully, now you have a general understanding of how it works! For more ways you can grow your business, check out our blog, 5 Unexpected Resources to Help Small Businesses.

This blog is for educational use only and does not provide any financial advice for small businesses.

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(Content Marketing Coordinator)

Ashley is the Content Marketing Coordinator at SAGE. She has a true passion for writing and blogging. In her free time, you can find her dancing ballet, cooking up one of her favorite recipes, or spending time with her husband Joe and puppy, named Pickles.

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