By Neil Hare
On June 12, the Fed announced that interest rates would remain between 5.25 and 5.5%, forcing small businesses to try to access capital in the highest interest rate environment in decades, ultimately making it harder and more expensive.
Of course, just because capital is harder to obtain, doesn’t mean you don’t need it to run your business, expand, and address cash flow issues. So how can you navigate this environment?
How to raise capital through a business loan
First and foremost, as we learned during Covid, you must get your business’s financial house in order to apply for any type of loan or look for an equity investment. Most lenders will demand two years of tax returns, profit and loss statements, and cash flow statements, so start there. That means investing in solid bookkeeping, an experienced accountant or accounting software, and legal advice when needed. There is free assistance for financial management from local chambers of commerce, SCORE chapters that offer free mentoring, Small Business Development Centers (ASBDC), and Women’s Business Centers (AWBCs).
As always, I recommend starting with a strong banking relationship. When you open a business checking account, try to establish a personal relationship with one of the small business managers at your bank. It is their job to ensure you get the best service and tools you need. Often, local and regional banks have more hands-on customer service, but the national banks also do a good job. Try to meet face-to-face with the manager over coffee or lunch to build a connection.
Unfortunately, even if you have your finances set and a good relationship with your bank, it is possible a line of credit or fixed-term loan could be hard to come by, especially if you are a relatively new business. You may not have a two-year track record of revenue or collateral—equipment you can use to secure a loan—or, perhaps, you’re coming off a bad year or two. Banks look askance at downward trends when interest rates are higher.
Jimmy Olevson, president and CEO of National Capital Bank, a regional lender in Washington, DC, acknowledges that the Fed decision will make borrowing more difficult for the foreseeable future. “The Fed decision to keep rates unchanged will continue to make it challenging for small businesses to borrow money,” he says. “Given how quickly the Fed raised rates, and the lag time it takes for those increases to truly affect the economy, I think we are still in the early stages of the ramifications for their decision.”
Non-bank lending options for raising capital
SBA
Fortunately, there are additional options to raise capital if you are having issues with a bank or need to raise more money than they approve. The first place to start looking is the Small Business Administration (SBA).
For starters, on June 7, 2024, the SBA announced a new 7(a) Working Capital Program (WCP) that will allow 7(a) lenders, with the backing of the SBA, to offer newly structured lines of credit designed to give more flexibility than an ordinary term loan. This pilot program is an extension of existing loan programs that will allow businesses to fund individual projects or orders and access capital earlier in the sales cycle. In addition, small businesses can collateralize assets to access this capital and reduce the costs of the loan through shorter maturities and to pay an upfront guaranty fee on an annual basis.
While this new program is exciting, existing SBA loans remain some of the cheapest forms of capital in the market. The 7(a) loan program itself is usable for real estate, working capital, refinancing business debt, and purchasing machinery, equipment, and furniture, among other things. The maximum amount of a 7(a) loan is $5 million, more than enough for most small businesses.
For longer-term fixed rate financing, the SBA also offers 504 loans. These loans go up to $5.5 million and are available through Certified Development Companies (CDCs), SBA’s community-based partners who regulate nonprofits and promote economic development. 504 loans can be used to purchase or construct buildings or new facilities, buy machinery and equipment, or improve property and existing facilities.
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Government grants
While the days of free money through the Paycheck Protection Program (PPP) are in the rearview mirror, the federal government still offers a multitude of grant options in addition to SBA loans. The following are a few examples:
- U.S. Department of Agriculture’s Rural Development offers loans, grants, guarantees, and technical support to rural-based small businesses.
- U.S. Department of Education (DOE) offers various grants to small businesses in the education space.
- Minority Business Development Agency (MBDA) offers grants and loans aimed at minority-owned businesses. They also have business centers throughout the country for in-person assistance.
- Grants.gov offers a database of all federal grants and a library of how-to content.
In addition to these federal grants, states and local governments, as well as corporations, offer grants and free technical assistance.
Crowdfunding
The latest innovation in small business lending is crowdfunding on fintech platforms. Crowdfunding is the modern version of the age-old plan of accessing capital from friends and family in the forms of loans or equity in your business. While seeking investment from friends and family is still popular, technology allows you to seek investors outside of your own zip code.
Jacob Haar, co-founder and managing partner of Community Investment Management (CIM), which provides debt capital to underserved small businesses by financing responsible fintech lenders, says, “Small businesses should expect higher costs of capital, but there are lots of great non-bank options, including responsible fintechs and other community-based lenders. There are multiple groups out there addressing gaps in the market,” Haar added.
Some fintechs that offer crowdfunding include SMBX, Honeycomb Credit, Wefunder, Kiva, and SeedInvest (recently acquired by StartEngine). All these platforms connect small businesses with investors who can make small loans that the platform aggregates on behalf of the business. The business then pays the investors back, typically with principal and interest through the platform, which charges a fee for the service.
As with any loan product, you should always read the fine print with fintech offers. In some cases, the interest rates are higher and there are fees. While paying more is the cost of doing business in this high interest rate environment, you should still be fully aware of what you are paying and seek out the lowest interest rates possible.
Find the capital you need
The economy remains in a precarious position without a doubt. Inflation, supply chain issues, workforce challenges, and rapidly changing technology are all still burdens on small businesses. But, the good news is capital is available if you know where to look. So again, put your financial house in order and then cast a wide net.
About the Author
Neil Hare is an attorney with the law firm Dentons LLP, the world’s largest global law firm. Neil specializes in small business policy and has run small business outreach campaigns for many major organizations. Neil is the author of two novels, An Animal Cries and God in Hell’s Kitchen. Follow him on LinkedIn.
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