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5 Types of Small Business Financing

Dec 03, 2020

Working capital is a must-have for any small business. Both start-ups and established businesses may find themselves in need of extra cash flow at some point in time, whether to navigate a financial emergency or to jump on a new opportunity. 


Check out these five options for small business financing, plus what to watch out for with each one.


Online Business Loans

Online business loans typically come with easy applications and quick funding decisions. The eligibility requirements vary depending on the lender. Some may only cater to established companies while others may focus on business owners with bad credit. 


One of the biggest benefits with getting an online loan for your small business is that you can receive your funds in your bank account fast — sometimes within a day after qualifying. But there are some drawbacks as well. Some lenders may require frequent, automated payments, making it crucial to manage your cash flow well. Interest rates may also be above average and you’ll also want to watch out for origination fees. These loans usually also require a lien on the business and potentially a personal guarantee as well. 


Comparing multiple offers through an online marketplace like Naleu can help you find the best option. 


SBA Loans

SBA loans go through traditional lenders but they’re backed by the federal government, making the minimum qualifications easier to meet. There are several types of SBA loans to choose from depending on the use of the funds, but you do need to be in business for at least two years to be eligible for most of them. 


One downside is that the application process can be cumbersome and come with longer approval times, sometimes up to three months. You also need to put a down payment on most SBA loans in order to secure the funds and some require a personal guarantee as well. 


On the positive side, interest rates are often lower than you’ll find elsewhere. Repayment periods may also be longer, giving you more time to make affordable payments.


Line of Credit

Instead of receiving a lump sum of cash like you do with a business loan, a line of credit acts more like a credit card. You have an available line to draw on whenever you need cash for your business. It can be beneficial if you have slow periods throughout the year or want a financial safety net. You only pay interest on funds you actually borrow, not the amount you have access to.


Do watch out for extra fees with a line of credit. Some financial institutions charge a monthly maintenance fee, even if you don’t have a balance. Also avoid long-term cash flow issues by dipping into those funds when you don’t actually need them. 


Merchant Cash Advance

If your business relies heavily on credit card sales, a merchant cash advance could help you qualify for quick financing. Once you receive the loan funds, you’ll begin repaying your balance through automatic deductions from your credit card sales. This can have a big impact on your cash flow. 


You’ll be charged an expensive factoring rate that is calculated as a multiple of the loan amount. So you won’t save any interest by repaying the funds more quickly. 


Invoice Factoring

A similar option for companies that rely on customer invoices is known as invoice factoring. The factoring company pays you a chunk of your outstanding invoices while you wait for payment. When your customers pay, you receive the remaining balance with a fee deducted for the advance on payment.


Invoice factoring comes with a similar fee as a merchant cash advance, which can end up being much more expensive than a business loan’s interest rate. Another consideration is that some invoice factoring companies require that they oversee the collection process, which means they will interact with your customers. 


With a variety of financing structures available to small businesses, it’s smart to weigh the pros and cons of each one to understand how your company will be impacted.


Ready to explore your small business financing options? Get started with Naleu.

The Cares Act and the Paycheck Protection Program: What is Important Going Forward?

By Alex Hunter • 11 Jan, 2021
During the initial phases of the COVID-19 pandemic, it became apparent that government intervention was needed to save a crashing American economy. To address the economic crises, the Trump administration signed the CARES Act into law, including the Paycheck Protection Program. However, with a program plagued with fraud and undercapitalized, a new program has been established. Below is a reminder of the original program and what has changed in the new. The Background The CARES Act: This $2 trillion program divides relief in the following ways: Individuals: ~$560 billion in the form of stimulus checks. Big corporations: ~$500 billion in the form of bailouts. Small businesses: ~$377 billion Other (mostly government programs): ~563 billion The Paycheck Protection Program (PPP) is a loan program designed to incentivize small businesses to continue to pay their employees as part of the CARES Act. What was Essential to Small Businesses? For small businesses, the most notable features of the Cares Act are as follows: The government defines small businesses as companies with 500 or fewer employees. $10 billion of grants are outlined in the bill. Individual companies are entitled to up to $10,000 in emergency grants to cover "intermediate operating costs." The bill outlined $350 billion for the Small Business Administration's Paycheck Protection Program. Individual companies are entitled to up to $10 million in loans. $17 billion was allocated to "cover six months of payments for small businesses already using SBA loans." Overall, the CARES act and the Paycheck Protection Program's incentive seems to be for the aid of small business employees. The legislation accomplishes this through forgivable loan payments to small businesses with continued employment as a condition. The CARES Act and Paycheck Protection Program also spell out specific changes in expenses and deduction rules to allow small businesses to have an easier time keeping workers on their payroll and staying open during the pandemic (NPR). According to the Small Business Administration (SBA), PPP loans have a 1% interest rate. Loans issued before June 5 have a maturity of 2 years, loans issued after June 5 have a maturity of 5 years, no collateral or personal guarantees required. CONGRESS APPROVES ANOTHER ROUND OF PPP On December 27, the US Federal Government approved a new $900 billion stimulus bill. About a third of the stimulus ($284 billion) will be allocated to small businesses in the form of forgivable loans - part of a revamping of the Paycheck Protection Program (PPP). The government on Monday was set to reopen its signature small business pandemic aid program with $284 billion in new funds and revamped rules that aim to get cash to the most needy businesses while stamping out fraud and abuse. Changes to the PPP PPP loan applications will officially be reopening after being closed since August. The funding in this round is significantly smaller than the CARES Act - a difference of over 300 billion. Key changes: A maximum loan amount of $2 million Businesses that received a PPP loan the first time can apply for a second loan under the new PPP, with certain restrictions. Employee maximum reduced from 500 to 300. Loans can now be used for software and COVID-19 protective equipment. Expansion of loan forgiveness up to $150,000, given 60% of the loan being used for payroll. Simplified application. 501(c)(6) non-profits now qualify for financing. Other Guidelines: Businesses that were initially unable to secure financing will be granted access to the application and select businesses that already received PPP financing through the CARES Act. An SMB's maximum loan amount can be calculated by multiplying your past year's average monthly payroll by 2.5. The total maximum is set at $2 million (compared to $10 million before). Borrowers can choose their covered period within the range of 8-24 weeks. PPP financing can be used for payroll, operations, supplies, rental and mortgage costs, and damages. Expenses paid with PPP loans are tax-deductible. Eligibility: To be eligible for the program, you must be a small business with fewer than 300 employees that experienced revenue losses of at least 25% from the first to the third quarter of 2020 compared to the same quarter of 2019. You must also continue to have workers on your payroll. In the Future: A Biden Presidency President-Elect, Joe Biden has noted essential changes in small business relief. The Biden administration plans to implement the following small-business-related measures under the "Make It Work" checklist: Implementation of a national work-sharing program for employers to utilize instead of laying off workers. Ensure equitable and speedy access to relief for all small businesses. Focusing substitute for small companies rather than large corporations and financial institutions. Establishing strong accountability and transparency policies. Establishing a CARES Act Implementation Office to ensure ease of access to knowledge about the government program. Begin work on a fourth stimulus package. See above, on the Joe Biden campaign website at https://joebiden.com/the-biden-make-it-work-checklist/ . Overall, it seems that the Biden administration intends to expand government relief, explicitly focusing on small businesses and other areas the previous package seemed to leave out. To date, the PPP has distributed $525 billion through more than 5 million loans.

3 Tax Tips for Small Businesses with Debt

By Alex Hunter • 14 Dec, 2020
Taking on debt as a small business can help in a number of situations, from providing the opportunity to expand to keeping your company cash flow positive while going through a rough patch. When you do get a small business loan or line of credit, there are a few federal tax considerations to keep in mind. Follow these three tips to minimize your taxes and ensure proper compliance. #1: Make Sure You Deduct Eligible Debt Interest  In general, the IRS allows you to deduct interest paid on most financing vehicles. Interest from term loans (both long-term and short-term) are eligible for this deduction, as are SBA loans. Lines of credit are eligible but the deduction may be limited depending on how much you actually draw on your line. Finally, the interest paid on personal loan funds that are used exclusively for business purposes also qualify. However, you cannot deduct interest payments on any of the money that you used for personal uses, so it may be helpful to have your accountant prorate the business-related interest. According to the IRS, the amount you can deduct may not exceed 30% of your adjusted taxable income. There are also some restrictions on deducting other loan fees. For instance, points and loan origination fees for any loans used for commercial real estate aren’t tax deductible. Also note that the loan balance itself is not deductible — only the interest you pay to the creditor. #2: Utilize the Bad Debt Deduction If your business has gone into debt and has unpaid invoices that you’re unable to collect, you may qualify for a Bad Debt Deduction . It’s treated as a loss that is considered worthless. The IRS classifies three types of business bad debt: Loans made to clients, employees, distributors, or suppliers Customer credit sales Business loan guarantees You’ll subtract this type of write-off from your business’s gross income in order to lower your tax liability. Also note that if you later recover some or all of the bad debt that you’ve written off, you’ll have to include it as part of your gross income, even in a later tax year. A tax accountant can be helpful in determining the best write-off method for your bad debt and which form should be used for your incorporation status. #3: Consider a Tax Payment Plan For businesses in debt with cash flow issues, it may be difficult to make tax payments to the IRS. Missing out on tax payments comes with a number of negative consequences, including a 5% penalty fee each month you’re overdue filing, and a 0.5% penalty fee for each month you’re late paying. Rather than incurring fees (and potentially leading to a tax lien on your business), consider applying for a payment plan with the IRS. There are options for both a short-term and long-term installment plan. The short-term option gives you up to 120 days to pay your tax debt and comes with no set-up fees. If you need more time, a long-term installment plan could be the best option. Set-up fees range from $31 to $225, depending on how you apply and what payment method you choose. If your company is struggling with various types of debt, stretching out your tax payments may give you some breathing room to focus on paying down other balances more aggressively. As you grow your small business and develop more complex financials, be sure to include a sound tax strategy to complement those changes. Utilize the expertise of a reputable tax accountant throughout the year. Also think about tax considerations as you choose the best type of financing for your company. Ready to compare options? Apply for small business financing with Naleu.
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