Best Options for Small Business Loans When Interest Rates Rise
In an era of high inflation and steadily rising interest rates, having cash is essential for small business owners. Securing financing can be a challenge and identifying the right type of financing can be critical to the success of your business.
Last week, the Federal Reserve announced a 0.75 basis point increase in its lending rate and indicated that further increases were likely to follow. For businesses that need cash to cover cash shortfalls or for growth plans, it is important to obtain financing at a reasonable cost of capital in a timely manner.
Cash flow is the lifeblood of any small business
Whether you’re an entrepreneur launching a startup or an established business ready to grow, getting the right source of funding can be the difference between success and disappointment. Even when they’re not in a period of growth, small businesses should have enough cash to weather the down times, absorb increases in fuel prices, labor costs, and raw materials. Supply chain shortages also impact the cost of simply meeting demand.
The amount of finance required by a business depends on many factors, including how long the business has been in business, its current financial condition, credit history, type of business, amount of finance required, and usage. money. Before you borrow, you’ll want to calculate the cost of debt so you’re sure of the total amount you’ll owe.
Ways to Get Small Business Financing
Financing a small business can be difficult, but it’s not impossible. Generally, online or alternative lenders can provide financing to your business faster than traditional banks. There are many options for financing a business:
- Personal savings – If you want to go into business, don’t expect to do so without putting some of your own money into it. Unless you’re already independently wealthy, you’ll probably need some start-up capital. If you are planning debt financing, banks and other lenders will expect you to “put your skin in the game”. After all, if you’re not willing to invest your money in the business, why would they?
- Family and friends – There are many pros and cons of borrowing money from friends and relatives. You won’t be required to provide your lenders with three years of tax returns, bank statements, and other documents required for a small business loan. In all likelihood, the interest rate, if any, will be low. But keep in mind that when family is involved, it can mean hiring an evil nephew and receiving unsolicited suggestions – or, even worse, demands – about how the business should be run. by people who might not understand the business. . Keep in mind that relationships will become strained if things go wrong. How hard will Uncle Ralph insist on reimbursement if the company goes bankrupt? Entering a family business has the potential to destroy family relationships.
- Traditional bank loans – Obtaining a small business bank loan is a proven method of accessing capital. The big banks generally offer the lowest interest rates, but they are generally the most conservative when it comes to making lending decisions. Currently, just over 15% of business loan applications from major banks are approved, according to the most recent Biz2Credit Small Business Loan Index (figures from June 2022). Before the pandemic, the number was over 28%. In general, the big banks have the strictest lending criteria. If you have a poor credit score or little or no credit history, it can be very difficult to get a small business loan from a bank. Moreover, the process can take weeks or even months.
- Regional and community banks can be a good source of SBA 7(a) Loans, and generally smaller banks are more likely to approve loans. In June, they granted 21.1% of the requests they received, according to the Biz2Credit Index. However, this is very different from 2019 and early 2020, when more than half of loan applications were approved. The good news is that smaller and smaller banks are partnering with fintechs and get started with online small business loans. This progression widens the flow of capital to small business owners. This helps small businesses that are minority-owned or located in underserved areas.
- Currently, interest rates on bank loans to businesses are in the Range 4.25% to 9%. But as the Fed continues to raise rates in an effort to fight inflation, we could see those percentages rise in the near future. Also keep in mind that small business loans are often variable rate loans. This means that the interest rate on the small business loan you received at 6.5% this year could be 8% next year.
- Alternative lenders – Non-bank lenders that offer products, such as merchant cash advance, provide a quick source of capital, have fewer requirements, and will lend to business owners with low credit ratings. These lenders take on a higher risk when providing capital, so naturally they get a higher reward in the form of higher interest rates. Often these rates start at 20% and go much higher. But if an owner is in crisis or has the opportunity to get a deal on spectacularly priced vacation inventory that can be sold for a big markup, it may be worth it. With a merchant cash advance, the business quickly receives an initial sum – sometimes within 24 hours – which is reimbursed by a percentage of the day’s credit card receipts. As with any loan, do your research and know what you’re getting into.
- Credit card – There are many stories about start-ups launched by founders “maxing out their credit cards”. While this path may be successful and credit is instantaneous, there are countless stories of would-be entrepreneurs who run into financial trouble borrowing through their credit cards at interest rates that start at 12-14% or higher. . Credit limits on cards can seriously reduce the amount one can borrow. So, over the stories, the owners max out multiple cards. Using credit cards to start a business and keep it afloat is risky and potentially financially devastating.
- Capital investment – Offering equity to investors is a viable financing option. The challenge is to find the right investor. In addition, by selling an interest, you also relinquish control. Anyone who has watched an episode of shark tank will know it well.
- Government grants – The SBA provides limited grants to small businesses and grants to community organizations that promote entrepreneurship, including those that support veteran-owned and disabled veteran-owned businesses and small business development centers.
Whether or not it is difficult to obtain financing for a small business depends on the revenue and profitability of your business, the type of financing you request and the amount of the loan. Other factors include your personal and professional credit ratings, time spent in business, and a solid business plan.
Conclusion: Carefully Evaluate Your Business Financing Options
Interest rates are not always the most critical factor. Often the speed of funding is much more important. If you hit a snag and are having trouble making payroll, which is a significant cost that continues to rise, quick funding is needed. Another reason why speed is essential: opportunity cost. Perhaps a supplier has decided to retire or close its doors. You could end up with an opportunity to get a great deal on clearance merchandise. In such a case, the opportunity cost of not buying quickly is high. This is when a loan from an online lender or a cash advance from a merchant really comes into its own.