Nearly 631,000 small businesses are based in Washington state, and together they employ some 1.4 million residents of the state. An important engine of economic growth, small businesses also face continuing challenges—- including economic challenges. Securing small business loans can be challenging, though, especially as the number of banks in the state has declined.
Here’s where to find small business financing for your Washington State business, and tips for qualifying for the financing your business needs.
How a Small Business Loan Can Help Your Washington Business
If you’re just starting a new business, small business loans can provide essential funding to help launch the business. For some that means money for inventory, equipment or supplies. For others it means funding for advertising and marketing, or even to hire contractors or employees.
Established businesses may need financing for a variety of reasons, including cash flow shortfalls, working capital, inventory, expansion or real estate.
According to research by the Federal Reserve, the number one financial challenge business owners reported facing was covering business expenses. While increasing revenues is ideal, being able to access financing can be essential.
Types of Small Business Loans to Choose From
While a bank loan may be the first option that comes to mind, the Federal Reserve 2020 Small Business Credit Survey found that less than half (44%) of small businesses obtained bank financing in the past five years. There are many different financing options business owners may consider:
Line of Credit
A great option for short-term borrowing, a line of credit offers access to financing up to a credit limit. Borrow what you need, repay it, and borrow again as necessary.
When you know you need to borrow a specific amount of money and want a predictable repayment schedule, a term loan can be the right choice. This type of financing offers a fixed amount of financing. Though interest rates may be fixed or variable, the repayment period is usually set at 2-5 years or even longer. (Some SBA term loans have repayment terms of 20-25 years, for example.)
For the most part, the U.S. Small Business Administration doesn’t make loans: Disaster Loans are the exception. Instead, it guarantees loans made by participating lenders. If your business applied for PPP, you experienced this first hand. You applied through a lender, not the SBA. But if you applied for an Economic Injury Disaster Loan (EIDL) you applied at SBA.gov.
There are multiple SBA loan programs, but the flagship program is 7(a) loans which max out at $5 million. The CDC 504 loan program involves a partnership between banks and non-profit lenders that are often Community Development Financial Institutions. And a variety of Export loans can help businesses that want to export or want to grow their exporting business. (Over 11,000 Washington State small businesses are involved in international trade by exporting.) All SBA loans are low interest with business-friendly repayment terms.
Business Credit Cards
Over half (53%) of business owners reported using credit cards in the SBCS. Small business credit cards are popular for many reasons, and one of them is accessibility. They are often available to new businesses as well as established firms. Credit lines can be generous and can be accessed as needed to smooth cash flow gaps. Cards with 0% APR introductory offers allow businesses to finance purchases over time.
Many businesses rely on expensive equipment, whether that’s manufacturing equipment or machinery, vehicles, or power tools. Health care businesses (the top category of employer firms in the state) may require diagnostic equipment or medical devices.
Rather than paying cash for equipment, many businesses choose equipment financing or leasing to help preserve cash, upgrade to newer models, get tax deductions or for asset protection.
Invoice Factoring / Financing
Businesses that invoice other businesses (B2B) sometimes find their business in a cash flow crunch while waiting to get paid. Invoice financing and factoring can help the business get paid faster, for a fee.
Commercial Real Estate Loans
Businesses wanting to purchase or expand a bricks and mortar location will typically turn to commercial real estate loans. In addition to traditional commercial real estate loans, the SBA 504 loan program is often used for real estate.
For some small businesses, a small amount of funding goes a long way. Microloans are smaller loans— often capping out at $50,000 or less. Many microlenders are non-profit Community Development Financial Institutions with a mission to help underserved business owners access capital and spur economic growth in the community. As a result, they may offer more flexible qualification requirements, and technical assistance to borrowers in the form of mentoring or consulting.
Most people think of GoFundMe or perhaps Kickstarter when they think of crowdfunding, but there are many different platforms that offer opportunities for small business owners to access capital through reward-based, loan-based or investment-based crowdfunding. This form of funding is available to startups as well as high-growth businesses, and successful campaigns can often be a stepping stone to traditional financing.
Business Cash Advances
Businesses with strong credit card or online sales may be able to access financing quickly through business cash advances. This type of financing advances financing against future sales. Payments are either taken from future sales or made daily or weekly through ACH debits. Business and merchant cash advances don’t generally require high credit scores and funding is fast. But it can also be expensive.
Suppliers and vendors often offer customers the opportunity to pay on net-terms. Net-30 terms means payment is due 30 days after the invoice date. It can be easier to qualify for than traditional financing, and a personal credit check may not be required.
Find net-30 vendors that are easy to qualify for here.
Small Business Loan Options for Washington State
A local bank or credit union may offer the most favorable terms, it can be harder to qualify. Online lenders often offer fast approvals and funding, but costs may be higher.
Most of the following lenders require applicants to have at least one year in business (and often two or more) as well as solid business revenues.
Line of Credit
Business Credit Cards
Commercial Real Estate Loans
Business Cash Advances
What it Takes to Get Approved for a Small Business Loan
The main factors that drive small business loan decisions are:
A business that is making strong sales is in a better position to repay a loan than one that is not bringing in revenue. Some lenders have minimum annual revenue requirements. Others may require average monthly revenues of a certain amount— usually for the last 3-6 months. Almost all will require documentation of sales/revenues in the form of business bank account statements, or by requiring the borrower to link their business bank account.
Traditional lenders may also require business tax returns and/or financial statements.
Not all types of financing require good credit, but many lenders will check personal credit and will often set a minimum FICO score required to qualify. Some lenders also check business credit. They may have minimum business credit scores required to qualify but more often they are looking for red flags such as collection accounts or too many UCC filings.
If you have a good business but bad credit, consider financing options for bad credit or fair credit.
Time in Business
In a perfect world, businesses wouldn’t need to borrow for the first two years in business. That’s the cutoff point where many lenders are comfortable that the business is likely to stay in business long enough to repay the loan. But of course, new businesses often need financing too. It’s harder for startups to get small business financing but there are some options including business credit cards, vendor financing and crowdfunding.
How to Choose the Right Loan for Your Washington Small Business
To choose the right loan for your small business loan requires you to consider a few key questions:
- How much do I need to borrow?
- How long will I borrow for?
- How much will the financing cost, and can I still make a profit after that cost?
With the answers to those questions in mind, you can then look for financing. Of course, it’s also important to consider where you are likely to be approved.
Small business loans may be made by banks, credit unions, as well as nonprofit or online lenders. Each will have its own criteria and qualification requirements. Crowdfunding platforms can help match business owners with backers to invest in their campaigns. And online marketplaces present lending options from multiple lenders to help borrowers save time finding the right loan.
How to Apply for a Business Loan in Washington State
Once you’ve found the right loan and lending partner, you’ll need to fill out a loan application. Online loan applications tend to be the fastest and easiest to fill out, while bank loans (including SBA loans) are likely to require a lot more documentation. Be patient and prepare to provide key information about yourself as the business owner and borrower, as well as the business itself.
Small Business Grant Options for Washington State
Business owners are often attracted to business grant programs, with good reason. Small business grant funds do not have to be repaid.
Grants are made by private foundations and businesses, as well as by state and local governments and the federal government. Businesses located in Washington State may want to check the Washington State Department of Commerce website for information on state grants, mainly those for business affected by the coronavirus pandemic.
It’s critically important to understand that small business grants are often very competitive, and will always require effort to find and apply for grants. To land some government grants, it may be necessary to hire a grant writer to make sure the requirements are met.
Additional Resources for Washington Small Businesses
Whether you are a new or established business operating in Washington State, there’s no reason to go it alone. There are numerous organizations that can improve your odds of success. Be sure to take advantage of these helpful small business resources, most of which are free.
Start with the Washington State Small Business website at Business.WA.gov. It offers some of the most detailed resources of any state small business website, along with a variety of options to get answers to your questions including Text/SMS, online chat, email or phone support.
You can download the Small Business Guide that features a number of small business resources available in the state. There’s an online Payroll Calculator on the website, and you can connect with The Small Business Liaison Team (SBLT) which includes representatives from 27 agencies.
In addition, the Washington State Department of Commerce is the state’s economic development agency and offers a variety of services to entrepreneurs in the state.
Washington Small Business Development Centers (SBDCs) provide free consulting and free or low-cost consulting to local businesses. They can help entrepreneurs with updating or creating a business plan, marketing strategies, access to capital and much more. In addition, SCORE mentors offer free business advice.Both of these organizations serve businesses in cities such as Seattle and Spokane, as well is in rural areas.
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