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As I write this, commercial interest rates – the rate companies pay for working capital, equipment and real estate loans – have more than doubled in the past year. My clients are now seeing commercial rates in excess of 10% – that’s going to be a major challenge for those who rely on debt to fund their operations and expansion, let alone entrepreneurs looking to start up and grow their businesses.
The financing environment will be difficult in 2023. Fewer companies will be approved for loans as the financial services industry contracts in response to persistently high interest rates, inflation and a slowing economy. But it’s not a catastrophe. There will be money if you are willing to pay for it. Here are your top picks to consider.
Related: 5 Best and Fast Small Business Loans (You’ve Never Heard Of)
Large bank loans
For starters, if you don’t need a loan, then you should Surely go to a traditional bank. Of course I’m joking. But traditional banks – and you know the names – are the most risk-averse of all lenders. They are going to lend money to companies with collateral, history, solid credit and the ability to pay back the loans almost without question. Interest rates and terms, assuming you meet those requirements, will always be the most favorable compared to other financing options.
Small bank loans
In addition to the major banks, there are independent and community banks and credit unions that all offer different types of loan agreements and may be more inclined to do business with a smaller company that is not as qualified to get a loan from a major bank. Still, these banks, while slightly more entrepreneurial, tend to be very risk averse as well and will require significant due diligence.
The best option in 2023 is to take a loan from a lender certified by the Small Businesses Scheme. Those loans (called Section 7a or 504) can be offered at market rates or slightly above market rates. Because most of the amounts are guaranteed by the federal government, the banks that offer these loans can do so for smaller companies with less financial history or available collateral and are at less risk. But it’s still not a slam dunk and you have plenty of hoops to jump through.
Related: Navigating the volatile corporate finance environment
If you are looking for a very short-term loan to meet an immediate financing need (a large inventory purchase, a down payment on a lease, a down payment on a new appliance), you can use an online banker such as Cabbage, Fund box and On deck. These companies charge extremely high annual interest rates, but no sane australiabusinessblog.com would borrow from them for the long term. The advantage is that these services dispense money very quickly – in some cases within 24 to 48 hours – and (unlike many banks) are more technology-oriented to collect data, monitor their loans and communicate problems.
If you work in retail you may want to consider a merchant cash advance, which are short-term loans provided by popular payment services such as Square, PayPal and QuickBooks Trading Services. Your loan qualifications are determined by your actual sales volume that these payment services have access to because they already process your funds. Like online lenders, the interest rates are much higher than what traditional banks offer, but the money is deposited into your account quickly and the repayment is done automatically through the sales transactions you record with the service.
If you are a very small business or a minority business owner or someone who is located in a lower income part of the world, you should definitely look into the Imitative state credit for small businesses. Thanks to previous pandemic-related legislation, $10 billion this year and next will be distributed by the Treasury Department to states (based on a number of factors) that will then be allocated to local nonprofits and other organizations that support small and minority businesses. You can google your state and the State Small Business Credit Initiative to find out which organizations receive this funding and then apply directly to those organizations. Grants and equity investments are also available through this program.
For startups and very small businesses, you can also look for microloans offered by non-profit organizations such as Kiva, for instance. These amounts are very small by definition, but organizations such as these also provide good advisory services and can put you in touch early on with other places that offer business financing.
While these companies don’t charge as much interest as some of the aforementioned online short-term lenders, the interest rates are still higher, but so are the approval rates. Collateral – often receivables (for companies that “charge” these amounts) and inventory – are required. The best place to find these lenders (and other more traditional forms of financing) are platforms such as Lendio and Fundera which provide a “marketplace” of various vehicles offered by their partners and an easy way to request them all.
What about credit card financing? You know you’ll be paying a hefty rate of interest, but don’t go all out on it – it could be a poor choice unless it’s for very short-term needs. Just be sure not to build your business around credit card debt because as interest rates continue to rise, so will credit card rates.
Family and friends
Finally there are friends and family. Much has already been written about this, so I don’t need to tell you about the potential dangers. You already know them. But getting a loan from a reasonable friend or relative can offer you a reasonable interest rate and flexibility. Everything depends on the people involved.
The conclusion is that 2023 will be a difficult year for financing. But not impossible. Just make sure you can afford it. And give yourself the flexibility to renegotiate in the future when rates eventually drop.