Find the right financing partner this Small Business Month
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There’s more than the race to celebrate in central Indiana this month. May is also National Small Business Month, and small businesses drive Indiana’s economy. In 2023, the U.S. Small Business Administration (SBA) reported that Indiana businesses with fewer than 500 employees accounted for 99.4% of all businesses in the state. With more than 530,000 small businesses employing over 1.2 million Hoosiers, supporting small businesses both as consumers and businesses is critical to our state’s economic health.
A key growth accelerator for small businesses is to gain access to capital. According to a survey of business owners by Forbes Advisor, 42.4% of respondents used business loan funds for business expansion, 29.4% made equipment purchases, and 28.6% used funds for marketing and advertising (Kiah Treece, “Small Business Loan Statistics And Trends 2024”). That said, we are living in a challenging economic climate today, and higher interest rates and inflation have made it harder in some cases for businesses to gain access to this capital.
How businesses seek funding and financial support today is changing, as well. The number of small businesses applying for traditional business loans decreased from approximately 43% in 2019 to 37% in 2020 to only 34% in 2021. While Forbes Advisor indicates “the reason for the decline in traditional financing is unknown,” it also implies it could be due to small businesses “picking alternative financing options, such as crowdfunding, peer-to-peer lending and fintech platforms.” (Treece)
When seeking lending, business owners need to understand the differences between traditional lending and alternative financing options and decide which route to pursue. Fortunately, the SBA and local partners have a wealth of resources available to assist. First, business plan preparations and projections can help a business gain access to capital no matter the source they seek funding from. The SBA’s resource page at SBA.gov/lendermatch houses an abbreviated checklist for owners to reference and gauge whether they are ready for a traditional SBA loan and then matches businesses to potential lenders who provide funding with competitive rates and fees.
Rates, fees, and when funds are needed should be high on a business owner’s list of considerations. For start-ups, it is more likely those business owners will have to lean on the SBA or alternative sources such as crowdfunding, angel investors, friends and family, or venture capital if they cannot secure traditional financing, although this route is typically more expensive.
For its part, the SBA is focused on helping small businesses succeed during this challenging economic climate and is currently waiving its fees on loans of $1 million or less until the end of September (SBA, “7(a) Fees Effective October 1, 2023, for Fiscal Year 2024”). It has also streamlined forms to make them easier for small business owners to use and updated its website with new features on how to start, grow, and maintain a small business – a great resource for all business owners.
While the Federal Reserve Small Business Credit Survey’s 2022 Report on Employer Firms noted just 42% of firms indicated they had their financing needs met, the 2024 Report on Employer Firms shows that loan applicants seeking financing from small banks had among the highest rates of both financing approval and satisfaction with lenders (Fed Small Business). For business owners who choose the traditional banking route, ask how the loan decision process works and who is involved in the process. There aren’t many banks that have local decision-making abilities, but those that do will not only understand how a small business loan will impact the local community, they are also typically able to process loan applications more quickly.
Finally, the most important decision on who to partner with is to align with an organization that takes time to understand your business, your short- and long-term goals, and serves as a trusted advisor. A financing partner should be thought of in the same light as your attorney and CPA – a vital member of the team working toward your business’s and Indiana’s economic successes.
The views and opinions expressed by the author are those of the author and do not necessarily reflect the official policy or position of Centier Bank, Member FDIC.