Funding Options Available for Small Businesses

Business PlanningSmall Business Funding
Written By Mollie Watkins

In Northwest Arkansas

Funding Options for Small Businesses in Arkansas

Intro to Small Business Funding

In this article, we will cover information and resources about funding options for small businesses. We provide this information as a resource for small businesses trying to figure out the small business funding puzzle. Business funding can come from a combination of sources such as friends or family, loans, grants, or crowd funding. In this article, we are going to review funding statistics, key terms, loan resources, grant resources, and crowdfunding resources.

Note: Comprehensive Consulting Solutions for Small Businesses is not a loan officer or lender. This blog and other related materials are based on client experiences, personal experience, loan officer interviews, and other sources and are provided for informational purposes. Any references to specific companies, terms, options, and related are not endorsements, recommendations, or guarantees but are provided as resources to help with your exploration of funding options for your small business.

 

Stats to Know about Small Business Funding

When operating a small business, having access to the statistics of small business lending can be invaluable. Seeing the habits and trends of small business lending can help small business owners understand how lenders and other business owners approach their finances.

Here are some small business lending statistics and trends according to Fundera:

  • "43% of small businesses applied for a loan last year.

  • 9% of small businesses received no capital after applying for a loan.

  • 14% of small businesses only received a portion of their requested funds after applying for a loan.

  • The average SBA loan amount is $107,000.

  • 32% of small business applicants turned to online lenders last year.

  • 70% of small businesses have outstanding debt.

  • 29% of small businesses fail because they run out of capital.

  • Only 48% of small businesses overall have their financing needs met.

  • 56% of small businesses apply for funding to expand their business, pursue a new opportunity, or acquire business assets.

  • 36% of small businesses that were denied at least some of the funding they requested were denied because of their credit score.

  • 57% of small business loan applicants sought $100,000 or less.

  • At 66%, the approval rate is highest for institutional lenders than for any other type of lending entity.

  • Biz2Credit’s Small Business Lending Indexes have found that institutional lenders—like pension funds and insurance companies, for instance—consistently have the highest small business lending approval rates. Other small business lending entities aren’t far behind, though:

    • Alternative lenders have a 56.8% approval rate.

    • Small banks have a 50.1% approval rate.

    • Credit unions have a 39.9% approval rate. ○ Big banks have a 27.7% approval rate.

  • At 85%, the approval rate for merchant cash advances is the highest of all types of small business funding. Merchant cash advances offer the highest approval rates of all forms of small business debt financing. 85% of small businesses that apply for a merchant cash advance get approved. However, you might be surprised at how the remaining forms of small business loans compare:

    • Auto and equipment loans have an 80% approval rate.

    • Business lines of credit have a 73% approval rate.

    • Home equity lines of credit have a 70% approval rate.

    • Mortgages have a 69% approval rate.

    • Traditional business loans have a 67% approval rate.

    • Personal loans have a 55% approval rate.

    • SBA loans or lines of credit have a 52% approval rate."

Cashflow and start-up costs

Start-Up Costs

18.2% of businesses apply for Business loans to help cover start-up costs.  Start-up costs are the expenses associated with starting a business. Start-up cost projections will be needed when determining funding. 

Begin by estimating the expenses of what you will need to start the business.

What will it cost you to get your business up and running? For each category of expense, draw up a list of everything you will need to purchase. This will include both tangible assets (for example, equipment and inventory) and services (for example, remodeling and insurance). Then, determine where you might purchase these goods or services. Research more than one vendor, i.e., comparison shop. Do not look at price alone; terms of payment, delivery, reliability, and service are also important. Here are start-up cost templates from Microsoft.

 

Working Capital

You cannot open with an empty bank account. You need a cash cushion to meet expenses while the business gets going. You should have a 12-month cash flow projection. This is where you will work out your estimate of working capital needs. This includes what income is coming in and timing + amounts of expenses / timing.

Here is an example of a cash flow statement and a small business cash flow projection template in Microsoft Office. You can also review in other programs such as Quickbooks.

 

Operational Costs

Operation costs are expenses that are associated with day-to-day, monthly, or annual business operations, such as utilities, lease/loan costs, phone, internet, taxes, etc. Add up the total expenses that need to be paid monthly, as well as annually the sum of each will amount to your total operating costs for running your business.

Operational Costs Example

Financial Statements

Financial statements are written records meant to convey a business' performance and activities. Financial statements include the business’ balance sheet, income statement, and cash flow statement and can be audited by government agencies, accountants, and firms. Financial statements are also used by investors and financial analysts to analyze the performance of a company and make predictions of the company’s future.

Here is an example of an income statement or profit and loss statement from Microsoft. For new businesses, we suggest creating a 12 month cash flow projection and 12 month profit & loss projections as a minimum. If possible, also create 24 month projections and update those annually.

Profit and Loss Template

Terms and Definitions

When thinking about small business funding, there are some terms and definitions you will need to familiarize yourself with, we will cover a few of those terms here.

  • Bookkeeping- Recording business transactions in a regular and systematic manner.

  • Business Line of Credit- An arrangement between a bank and a customer, establishing a preset borrowing limit that can be drawn on repeatedly.

  • Business Plan - A detailed plan written in document form describing how a new business plans to achieve its goals.

  • Cash Flow - The net amount of cash and cash equivalents that are being transferred in and out of a business.

  • Credit Score - A number ranging between 300-850 depicting creditworthiness. Businesses have a separate credit score – we suggest creating a profile on Dun and Bradstreet.

  • Collateral - An asset owned by the borrower that a lender accepts as security for extending a loan. Collateral can be seized if the borrower defaults.

  • Crowdfunding - The use of small/large amounts of capital issued by a large number of people in order to raise money or fund a business.

  • Equipment Financing - The use of a loan or lease in order to borrow against assets for your business.

  • Grant - An award given by the federal, state, or local government to fund some type of beneficial project.

  • Invoice Financing - Borrowing money against billed invoices.

  • Merchant Cash Advances - A short-term financing option that a business can receive in a lump sum and pay back incrementally.

  • SBA Loans - A loan from a lending institute, where the SBA could guarantee as much as 80% of the loan principal.

  • Short-Term Loan - A loan that is issued to assist with temporary needs.

  • Tax Returns - A form filed with a tax authority stating the taxpayer's gross income, deductions, and profit from business operations.

  • Term Loan - A loan from a lending institute for a specific amount that has a specified repayment schedule with a fixed or floating interest rate.

Loans as a funding option for small businesses

Funding Sources | Loans

When searching for funding for your business, there are many options to look at and choose from. This section will focus on loans and their sources as ways to find funding. If you are looking for a complete guide to how loans work, we recommend checking out this funding guide from Fundera or the Chamber of Commerce.

 

Types of Loans:

  • Commercial Property

  • Construction

  • Crowdfunding

  • Equipment

  • Farm and Agriculture

  • Invoice Financing

  • Line of Credit

  • Merchant Cash Advances

  • SBA Loan

  • Short-Term Loan

  • Term Loan Collateral Examples

  • A/R

  • Business Assets

  • Business CD

  • Cars

  • Equipment

  • Insurance Policies

  • Inventory

  • Investment Accounts

  • Property

 

Potential Loan Sources in Northwest Arkansas

  • Forge - FORGE is a CDFI, or community development financial institution, that provides capital and business development services designed to help individuals start and grow successful small businesses to build communities through collaborations with other non-profits, higher education institutions, corporations, and public agencies and to create scalable program models with measurable impact that can be replicated in communities across Arkansas and the Ozarks.

  • Communities Unlimited in Fayetteville - https://communitiesu.org

  • Local Banks and SBA Lenders

  • Online Sources - Here are a couple sources that list online funding options, but there are more available through an online search.
    - Fundera
    - Nerd Wallet

Grants as Funding Option

Grants

What is a Grant?

A grant is an amount of money that a government or other institution gives to an individual or to an organization for a particular purpose.

 

Grants or Articles about Grants with lists of National Vendors:

 
 
 

Grant Association in Arkansas

The Grant Professionals Association is a great resource for connecting with grant pros in Northwest Arkansas.

 

Example Questions to Ask a Grant Writer

  • How many years of experience does she/he have in writing grants?

  • How many grants has she/he written proposals for?

  • Does she/he have experience with writing grants for a non-profit like yours?

  • What is the grant process?

  • How long does writing a grant take and how long does it take to hear back in her/his experience?

  • How much are her/his grant writing services? What do they include? Any contingencies if the grant is not received?

  • How many grants has she/he helped non-profits receive?

  • What percentage of grants are approved (award rate or success rate) in her/his experience?

  • Does she/he know of any websites or grants that you should check out?

Crowdfunding Business Funding option

Crowdfunding

 

What is Crowdfunding?

Crowdfunding is the use of money issued by a large sum of people in efforts to raise money or fund a business.

Crowdfunding is usually done on various platforms specifically designed for various crowdfunding projects.

 
Funding ideas

Next Steps:

➔ Review your funding needs and complete your business plan and prototype, while looking for the right funding options for you and your business.

➔ Gather documentation needed and apply.

➔ For more information on your application, speak to your respective business lender or banker, grant organization, or crowdsourcing platform.

Comprehensive Consulting Solutions is a business advisor and business consultant in Fayetteville | Northwest Arkansas. We help clients with business planning, marketing, recruiting and more.

 

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Mollie Watkins https://www.consultingnwa.com
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