Startups often rely on small business loans and grants to grow a company from the ground up, but how is this funding affected by current regulations and restrictions, and what are your best funding options?
There are plenty of new developments in small business funding, namely the growth of private and government-backed funding sources. Here, we’ll explore some of the most popular funding sources for small businesses, as well as any challenges you might come up against during the application process.
Small business loans in 2018: what are the restrictions?
The main reasons you might not get approved for a loan in 2018 include:
- You’re a startup: you must have at least 2 years in business to qualify for an SBA loan, and most other small business loans will want to see a track record of your profits and losses.
- You have a low credit score: to qualify for a small business loan, you will usually need to show a credit score of at least 600. If your credit doesn’t match up, you might be able to secure funding through a company that emphasizes other criteria, such as Fundbox or PayPal Working Capital.
- You’re considered high-risk: since the economic downturn, banks are especially adverse to risk. In other words, they want to protect themselves in case a business owner cannot pay back a loan. Therefore, you might only be able to take on a secured loan that’s dependent on capital if you’re considered a high-risk borrower. If you don’t have capital, you can go with a lender that doesn’t require assets – such as Accion, Fundbox or Behalf.
- You belong to an excluded industry: many lenders have industry criteria that dictate whether or not you can get funding. Excluded business types include life insurance companies, lobbying organizations, and certain types of health businesses.
Small business loans and grants in 2018: what are your options?
Firstly, let’s look at one of the most popular lending streams for small businesses: Small Business Administration (SBA) loans. These loans are attractive for business owners because they offer a range of loan sizes and repayment terms, as well as interest rates as low as 7%. However, it can be difficult to get approved, and there are many restrictions that may stop you from getting the funding you need.
Since SBA loans have very favorable terms for borrowers, they are highly competitive. The process of applying for one of these loans is complex and can take several weeks. Therefore, it’s best to understand the requirements before you begin your application so that you can have the best chances of acquiring one.
Criteria for SBA loans is as follows:
- You must be a US-based, for-profit business in an eligible industry.
- You’ve been in business for a minimum of 2 years.
- You’re a small business owner. Businesses are considered small if they don’t exceed $15 million in net worth or $5 million in net annual income.
- As a business owner, you must have a strong personal credit history.
- You must have a robust business plan, including a value proposition, analysis of your competitors and 3 to 5 years of financial projections.
- You should promote a unique selling point (USP) that distinguishes you from others in your industry: why should you get an SBA loan over another small business?
- You must be able to show personal and business tax returns.
- You must have a personal guarantee. This is necessary for all SBA loans. A personal guarantee is essentially a signed promise to pay back the loan with personal assets if the business can’t afford to pay back the loan.
The Small Business Innovation Research program (SBIR) is a government-backed program coordinated by the Small Business Administration (SBA). It is primarily aimed at small businesses conducting research and development, such as those in scientific and technological sectors. Therefore, you could be entitled to a contract loan or grant if you work in one of these areas.
To qualify for an SBIR grant, you must meet the following criteria:
- Your project must meet specific government research and development needs.
- Your project must have the potential for commercialization.
- You must be a for-profit business.
- You must employ less than 500 people.
- The business owner/s must permanently reside in the United States.
Approximately $2.5 billion is awarded to small businesses through this program each year. In the words of program founder Roland Tibbetts, the funding scheme aims to:
“Provide funding for some of the best early-stage innovation ideas – ideas that, however promising, are still too high risk for private investors, including venture capital firms.”
The Small Business Technology Transfer Program (STTR) uses a similar approach to the SBIR program to expand partnerships between small business owners and nonprofit U.S. research centers. The main difference is that the STTR program requires the company to have a partnering research institution, which must be awarded a minimum of 30% of the total grant funds, whereas the SBIR program does not.
As a startup business, it can be hard to raise enough capital to secure a loan. The solution? You can borrow from a non-profit lending service like Accion: a popular nationwide loan provider that specializes in lending to new small businesses. Accion lends a maximum of $30,000, so this is generally a solution that’s aimed at startups and businesses requiring small amounts of funding or a top-up loan.
Other business loans and grants
In 2018, SBA loans and SBIR grants are great, low-interest rate loans for small businesses. However, if a bank rejects your application for one of the reasons above, there are other lending streams you can try, including non-profit small business grants, business loans for women and peer-to-peer lending services.
Today, there are more funding options than ever for small businesses. However, before you settle on a way to finance your business or startup, you should research your options and the restrictions they might present so you can choose the best, most affordable small business loan.