“It’s not what happens to you but how you react to it that matters.” This quote, attributed to Epictetus, may sound cliché, but it’s just as true today as it was in ancient Greece. Tough situations may come your way, but you can face them head on. In business, your ability to adapt to change relies on your working capital. Working capital—or the amount left over after subtracting your liabilities from your assets—can be used to cover emergency expenses or take advantage of new opportunities. But how can you increase your working capital at a moment’s notice? It can take months or even years to develop campaigns and increase your revenue to outpace your expenses, and by then, how many opportunities will have slipped by?
With loans or alternative financing solutions, small businesses can quickly get the resources they need for their current situation. Responsive financing makes it possible to:
Open new locations
Invest in equipment
Make payments during slow seasons
Develop new products and services
Business financing makes you agile in a constantly changing market, and the right solution for your business will depend on its size, years in operation, financial situation, goals, and more.
When it comes to financing solutions for your business, you can expand your working capital by taking out loans from a commercial bank or local credit union, applying for a small business loan through the Small Business Association (SBA), or securing short-term financing through organizations like Backd. Some of the key differences between these options include ease of access, repayment structure, and borrowing limits.
Loans are one of the most well-known ways for small businesses to obtain extra working capital. As the owner of a small business, you have several options for which institution to work with to secure financing. You will also be able to choose between term loans, Small Business Association loans, commercial real estate loans, and more.
Commercial banks have established name recognition and operate in many locations, which many small business owners may find appealing.
Higher Maximum Loan Limits: Through a small business loan, commercial banks will often offer loans of up to $5 million.
More Branch Locations: It’s hard to drive through town without seeing at least a few commercial banks. This gives you more options as a business owner. You can compare rates and see who will give you the best opportunity.
Low Approval Rates: During times of economic prosperity, commercial banks approve approximately 15% of applications for small business loans. When the economy isn’t booming, even fewer small business loans are approved.
Higher Fees: When doing business with a commercial bank, you’ll typically pay higher fees than if you had gone with a credit union. Commercial banks are beholden to shareholders, after all, and their primary goal as financial institutions is to turn a profit.
Credit unions may be a little harder to find than commercial banks, but they often make up for having fewer locations by charging less fees and boasting higher approval rates.
Higher Approval Rates: Approval rates for small business loans tend to hover around 20% through credit unions. It still isn’t easy to get a loan, but you could have better luck with a credit union compared to a commercial bank.
Lower Interest Rates and Fees: Credit unions are nonprofit institutions, so you’ll often find better deals with fewer fees than when doing business with a commercial bank.
Strict Membership Requirements: To be a member of most credit unions, you need to live or work within that union’s location. If you operate outside of that area, you can’t apply for a membership or a small business loan.
Fewer Branch Locations: It can be easy to find a commercial bank—they’re on practically every corner! This isn’t the case for credit unions. There will usually only be one branch per town or section of a city. This leaves you with fewer options for who you want to conduct business with
SBA loans are not provided directly through the Small Business Association. Instead, they partner with approved lending institutions, such as commercial banks, credit unions, or online lenders, to finance small business loans.
Lenders Are Vetted by the SBA: Commercial banks and credit unions usually have a good reputation, but many business owners may be wary of online lenders. SBA loans are backed by the U.S. government, which can help business owners feel more confident when borrowing.
Wide Range of Amounts Offered: Small business owners can take out loans ranging from $500 to $5.5 million. This flexibility makes it easier to meet your current situation, whether that’s increasing inventory in a pinch or funding an extension on your storefront.
Capped Interest Rates: The SBA puts a maximum cap on small business loan interest rates, so they can be more affordable than financing options not approved by the SBA.
Longer Approval Process: Your SBA loan application will often need to go through an additional approval process. It has to be accepted by your lender, and it may also need to be approved by the Small Business Association. This lengthens the time it takes to get your loan (up to 2-3 months!) and can make an SBA loan unfeasible for meeting time-sensitive financing needs.
Requires a Down Payment: Most SBA loans require a down payment between 10% and 30% of the value of the loan.
May Require Collateral: To lower the risk for lenders, SBA loan requirements tend to include collateral. For example, you may need to offer an asset—such as your home or car—to give to the lender if you fail to pay back your loan.
The Paycheck Protection Program offered loans to small businesses through the SBA with the purpose of keeping workers employed during the Covid-19 pandemic. These loans covered up to 8 weeks of payroll expenses and included benefits. Businesses could also use these funds to pay mortgages, rent, and/or utilities. Unfortunately, the small business loans PPP ended on May 31, 2021. However, existing borrowers can learn about applying for PPP loan forgiveness here.
Loans aren’t your only option for acquiring working capital for your small business. With short-term financing through Backd, you can skip the lengthy application process that other lenders put you through. This allows you to bridge your cash flow gap before your challenge spirals out of control or your opportunity slips away.
Quick Turnaround Time: SBA loans can take up to 3 months to get you the working capital you need. Backd can get you up and running in less than 48 hours with same day decisions and accessible capital within 24 hours after approval.
Easy Application Process: With a simple, online application, you can start growing your business without taking time away from running it.
Established Businesses: To receive working capital or a line of credit from Backd, you need to have been in business for at least one year.
Annual Revenue: To borrow working capital from Backd, you must earn at least $100,000 in annual revenue.
Small business loans can be difficult to get, but applying for an SBA-backed loan—whether through a commercial bank, credit union, or online lender—can increase your chances of success. You can further improve your application by building your credit score, not taking out multiple loans at the same time, and establishing a steady cash flow with your business.
Business loan requirements can vary from lender to lender, but generally, you’ll need to provide your personal and business credit scores, annual revenue, years in business, business industry and size, business plan and loan proposal, financial statements, and other documentation. It’s a lot of information to gather, but leaving anything out can result in your application getting denied.
Having a poor credit score (below 600), having a high debt-to-income ratio (above 36%), and only being in business for a short time can disqualify you from getting a small business loan. Small businesses are already a risky investment for banks. In fact, 20% of businesses fail during their first two years, 45% fail within their first five years, and 65% fail within ten years. To qualify for a small business loan, you’ll need to convince your lender that your business will survive at least long enough to pay back the money you borrowed.
Start-up business loans are usually harder to find than lending options for established businesses, but you can apply for SBA-backed microloans to get your business off the ground. These loans typically have a maximum limit of $50,000, and the average borrowed is $13,000. These do come with restrictions, however. They can’t be used to pay down existing debt or purchase real estate. They can be used to provide working capital, purchase machinery and equipment, and stock inventory.
It is much more difficult to get a small business loan with bad credit. If your business doesn’t have an established credit score or has a score below 600, you may have to rely on your personal credit for a loan. The easiest way to build credit for your business or yourself is to take out a credit card and make recurring monthly payments on time.
Most lenders limit the amount of money small businesses can borrow to between 10% and 30% of their annual revenue. For example, if your annual sales total $1 million, you will likely be able to borrow between $100,000 and $300,000. However, just having a high annual revenue won’t guarantee a loan. You still need to have a good credit score and an acceptable debt-to-income ratio (usually below 36%).
When sales drop off and you need to meet payroll, a crucial piece of equipment breaks down, or you have a brilliant idea for a product that you want to manufacture and stock in your store, you need working capital to get the job done. And you need that capital quickly. Unfortunately, applying for a loan backed by the Small Business Association can take two to three months. By then, you’ll be dealing with disgruntled employees, limited ability to offer your services or a fantastic opportunity that slipped out of your hands and into a competitor’s.
Backd gives you access to capital when you need it so you can take control of your situation, not the other way around.
Why deal with the hassle of a bank application process when you can use our online application and receive a decision on the same day? All you need to apply is:
At least 1 year in business
Minimum revenue of $100,000
A business bank account
Once approved, your funds will be available within 24 hours.
When you trust Backd for financing your working capital needs, you’re getting the experience of partnering with over 10,000 small businesses that have borrowed a total of over $1 billion. Backd incorporates what works best for business owners, like competitive rates and flexible terms. By only requiring a soft pull on your credit, your credit score won’t be affected when you apply for financing.
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