The Variety of Small Business Funding Options Has Never Been Greater
Small business owners frequently contact their CPA or tax preparer when they need funding. Perhaps one of your clients' needs a small injection of cash to meet payroll during a slow month. Or another client's company is booming and needs expansion capital.
As a trusted adviser, you'll want to be able to provide guidance in a way very similar to when you give tax advice. Here are some points to keep in mind when having conversations with clients who own small businesses.
Consider the different categories of lenders.
Big banks are often the first lenders that small business owners approach. What you may not realize is that big banks typically, have more than $10 billion in assets but approve fewer than 25 percent of loan requests.
Smaller banks grant almost half of funding requests. They often push SBA loans, which are backed by the Small Business Administration. These loans are attractive, but because a government agency is involved, there is more paperwork involved, which can be time consuming.
Non-bank lenders are a viable source for funding, however it is important to do research. For instance, merchant cash advance companies are frequently more willing to grant loans than banks are, but they charge significantly higher interest rates.
All loans are not created equal.
Identifying what type of business loan your client needs is imperative. Borrowers should understand the differences between the following:
- SBA loans. These are government-backed loans that are provided to small businesses through banks and other lenders, including credit unions. The SBA itself does not lend directly to small business owners.
- Term loans. This is a common type of bank loan granted to small businesses for expansion, acquisitions, refinancing, and working capital. Long-term loans are typically repaid on a monthly basis and tend to be in larger amounts and with lower interest rates than short-term loans. They are also generally easier to obtain for successful businesses. A secured loan is one in which a borrower puts up a specific asset or property (collateral) that a lender can seize in case of default. An unsecured loan, on the other hand, is granted on the basis of a borrower's creditworthiness, credit history, and reputation, rather than by pledging assets as collateral.
- Lines of credit. A line of credit provides a business with access funds incrementally as needs arise, rather than having to borrow a large sum at one time. It is used much like a credit card. A line of credit is considered a short-term fix, and interest and fees can be high. Thus, they are best utilized in cases of temporary cash flow issues, not for capital improvements, expansion, or business acquisition.
- Alternative financing. Non-bank lending products include merchant cash advances that are repaid as a percentage of daily credit card receipts. These generally are short-term loans at very high interest rates, as much as 30 to 40 percent.
- Peer-to-Peer lending (P2P). P2P became commonplace through companies such as Kickstarter and Indiegogo, which presented sources of funding provided by individuals through online platforms.
- Marketplace lending. Marketplace lending is the evolution of P2P lending. Through online technology connecting borrowers and lenders, marketplace lending platforms enable small businesses to secure capital from hedge funds, family funds, insurance companies, and other institutional (nonbank) lenders.
Biz2Credit is among the leading firms involved in marketplace lending, which has disrupted the bank-based loan system of financing small businesses. If you need to help a client navigate through the myriad of options, Biz2Credit loan experts are available for guidance. There is no consultation fee. To contact Biz2Credit, visit www.biz2credit.com or call us at (800) 200-5678.
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