Which Lending Options are the Best for Small Businesses

By Civic Federal Credit Union
5 min read
March 19, 2021
Which Lending Options are the Best for Small Businesses

Small businesses are big in North Carolina. In fact, 99.6 percent of businesses in our state are small businesses. An important part of running and growing a business is having access to funding. One way to help secure financing is to understand what lenders look for - and how you can act now to prepare.

An important first step is to plan during the calm and avoid last-minute decisions. At that point, it becomes an emergency need rather than an exercise in planning. Take time now to think about your business, finances and position in the marketplace. These steps will help increase your success to get the funding you will need.

And remember, the right lender wants you to be successful.

To start, it is important to know whether you need cash now (short-term) or for a longer period of time. There are different types of funding; each one may not be the solution for your unique needs. Some small businesses may need to solve an immediate need for cash with short-term financing. Here, credit cards or a micro-loan may be helpful. Other businesses may need funding to pay for equipment or a real estate purchase with a loan or a revolving line of credit.

Knowing the time frame of your challenge will help guide the type of funding you may need.

Funding Sources and Types

There are different types of funding that can include equity or debt. Equity financing requires small businesses to give shares of their company. This type of funding can be obtained from non-bank lenders which includes investors. There are also grants which do not have to be paid back, but require accountability for how the funds were used. For more traditional debt-financing options, you’ll want to look at your Credit Unions and traditional banks.

For the purposes of this article, we will focus on funding options that use debt. The most common small business and debt-funding options are:

  • Real Estate Loans: Commercial Real Estate loans can be used for many different reasons. If you are tired of leasing you might be better off owning. You can use your commercial property as collateral for various business purposes. Talking through your needs with your lender is the first step.
  • Equipment financing: Here, you borrow money to pay for equipment and make payments on the loan. Once it is paid, you own the equipment.
  • Auto loans: Getting your fleet on the road is critical to many businesses. Look for flexible terms, no fees for early payback, and low rates.
  • Business term loans: There are many types of business loans, so a discussion with a lender will be important.
  • Lines of Credit: This is more like a credit card with flexible ways to access money when you need it.
  • Credit Cards: This is a staple item for businesses that helps carry expenses until you can pay them off.
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Now that you know about the types of financing, what do lenders want to know about you?

Being prepared will help these conversations produce your desired outcome: funding. Just remember, it is in the lender’s interest to help you be successful and give you guidance about your options. After all, they not only want to see your passion, but expertise in the industry, and knowledge about your specific market region.

5 Questions to think about that a Lender might ask

  1. What businesses offer the same products or services in your geographic area? [Be specific and get ready for the next question below.
  2. How are you differentiating yourself? [Share things you are doing that your competition is not and how it resonates with customers.]
  3. What experience do you have in this type of business? [Have examples ready that show your role(s) and how you contributed.]
  4. Have you owned or operated a business - or both? [Be honest, here about what level of experience you have, and most importantly, your industry knowledge.]
  5. What personal funds have you invested in your business? [This speaks to “If you won’t invest in your business, why should I?”]

How Small Businesses Can Prepare Now for a Business Loan

Success is where preparation and opportunity meet.” – Bobby Unser, Indy race car driver

  • As a small business owner, you are a guarantor for your business. Your personal financial picture and credit is just as important as the business financial picture and credit.
  • Know the differences between personal and business. There can be major differences between financing for personal and for businesses. Many first-time small business owners bring their personal experiences to their approach to business funding. For example, a commercial real estate loan does not function the same way as a personal mortgage. Commercial real estate loans are not for a straight 30 year term(s) as many people may expect, rather we use shorter terms with amortization of up to 30 years. It is important to know the differences so you can understand, plan, and act.
  • Get your finances and cashflow statements in order. That means, having the details of your business in a spreadsheet or in a report from a financial management software program. A balance sheet will share important information about expenses and income. Remember, good data in, good data out. Lenders want to see your attention to detail and understanding of your numbers. These numbers will also show a comprehensive view of your business and highlight areas of possible related need. This helps the lender give you options for your unique business goals. Most important, know your audience – lenders are number people.

Your Funding Success

Small business owners are a significant part of North Carolina’s economy. And access to the right funding is essential to your success.

Your make-it-happen mindset deserves a lender with the same enthusiasm. By doing so, you will continue to create jobs, contribute to your local economic growth, and build momentum for strong communities across North Carolina.

Disclaimer: You + Money blog posts are provided for informational purposes only and not intended to replace the advice of a financial, legal or accounting advisor.

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