The world is a very different place for owners of small businesses right now. Depending on which lender you talk to, banks may be pulling back on their funding for small business loans by tightening standards or even pausing lending altogether in light of the uncertainty caused by COVID-19.
With that in mind, you may want to turn to private financing loans or other financing option in order to make sure you can keep up your business operations and even set yourself up for the future. You actually have several options, which we’ll discuss in this blog post.
What’s A Private Business Loan?
A private small business loan is any loan not given by a traditional bank or backed by the government through the Small Business Administration (SBA).
The key differentiating factor here is that in addition to the things you can typically use a small business loan for such as working capital, payroll and equipment financing, you have the opportunity to explore a variety of loan options that are more tailored to what you might be trying to do as a business owner.
Types Of Small Business Loans
The rest of this post is going to cover the types of loans you can get as well as the assistance you might be able to take advantage of during COVID-19.
Before we get into the different types of private financing loans, let’s go over what a more traditional small business loan looks like so that you can have some context. It’s also important to note that this type of loan may be offered by private lenders as well, despite being traditionally offered by business or the government.
Term Small Business Loan
A traditional small business loan can be used for things like working capital, equipment purchase or even buying buildings. It’s a long-term loan with a low rate. These are often funded by banks or the SBA.
These longer-term loans are good for long-term business projects, but not everything is that. They also take longer to qualify for. There tends to be lots of documentation, and you need really good credit. Not everyone fits this category.
Private lenders may do these loans and you may have options for shorter terms. Private financing loans may also have slightly looser credit standards in exchange for potentially a higher cost of the capital, although they still tend to be affordable. In some cases, these loans can be approved faster than a loan through a traditional bank or the SBA. Depending on the particulars of the loan, there may also be more flexibility as to what you can fund with the loan.
Line Of Credit
The second private financing loan option, a line of credit for your business, is analogous to a personal credit card you might have or even a home equity line of credit and works largely the same way. Essentially, you can access a pool of money that you’re approved for, but you only have to pay interest on what you actually use.
When you do withdraw money, lines of credit are often paid back on a daily,weekly or monthly basis. The line of credit offers a lot of flexibility to cover things like getting extra inventory or hiring seasonal labor as well as helping you get from one quarter to the next if most of your orders come a certain time of the year.
This loan isn’t for everyone. Sometimes there’s a minimum amount that must be drawn on the line of credit at all times, and the rates may be a bit higher than they are for term loans, functioning similarly to credit cards.
Since the line of credit is such a flexible source of funding, you might use it for a number of things including transitioning your business online to help you adapt to the changing business environment caused by COVID-19.
A bridge loan is short-term financing used to stay afloat while waiting for other funding with more favorable terms to come through. If you knew you had a high expectation of receiving a loan in the next few months or were waiting to close a round of funding, you might use a bridge loan until you received the funds from the new deal.
Bridge loans may be paid back in terms anywhere from 3 – 18 months and typically have daily or weekly payments. However, a bridge loan could be a good option if you just need the cash in the short-term and will soon be getting a more permanent source of funding.
Other Financing Options
If a new loan doesn’t seem right to you, you do have a couple of other options that you can take a look at. Let’s go through them.
Merchant Cash Advance
A merchant cash advance, sometimes referred to as a business cash advance, is a purchase and sale transaction where the business sells a portion of its future credit card or other receivables. Instead of having a fixed payment that has to be paid back on a daily, weekly or monthly basis, payments are made based on your credit card sales
Payments for a merchant cash advance are made by taking a percentage of your credit card receivables until the advance is paid. Because of this, there’s no set term and that makes this a very flexible.
If you can show strong sales, credit also doesn’t tend to hold you back with a merchant cash advance because payments are based on the performance of your business.
Small Business COVID-19 Relief
In the wake of COVID-19, business has certainly changed temporarily and in some ways maybe for a lot longer. As businesses feel their way through this new reality, it’s natural to struggle a little bit. The good news is that small business relief is available.
There are a couple of small business COVID-19 relief options available from the federal government, most notably one from the federal government in the form of the Paycheck Protection Program (PPP). The best thing about the PPP is that if you follow the terms of the loan and spend at least 60% of the loan funds on payroll the remaining funds can be used on mortgages or debt obligations that were incurred before February 15 of this year.
Beyond the relief offered by the federal government through the forgiveness and the Economic Injury Disaster Loan (EIDL) along with associated grant funds, many states are also offering assistance and programs of their own intended to provide small business relief.
Private lenders may have their own options when it comes to small business relief, so if you feel you need assistance, don’t hesitate to reach out to the servicer of your loan to see what your options might be. Additionally, states and localities may have programs and relief options available.
There are also free resources available which may provide some small business relief to those impacted by this situation. With the right combination of business funding and making use of the resources available to you, it’ll help you survive this situation and come through it with renewed strength.