On July 11, 2022, for the first time ever the exchange rate between the US dollar and the EURO reached parity. With the volatility of a recession and uncertainty looming across the global market, small business lenders and community banks will certainly think twice in providing loans. What is abundantly clear is that small business owners will continue to rely on financing to sustain and grow their businesses. This article explores several recession-proof ways small businesses can take on business financing without the worries of the recession affecting their options.
By Thomas Tramaglini, Managing Director at BRP Onesta
info@BRPOnesta.com
www.backofficedepot.com
www.thomastramaglini.com
About Thomas Tramaglini
Recessions never good for the economy. BUT…sometimes recessions can be good for small businesses.
While there would be few who would suggest that a recession is good, during recessions there can be
opportunity for small businesses to thrive.
For instance, some industries like grocery stores, home health care, bars and restaurants with liquor sales, maintenance services, and the sweets industry tend to gain quite well. Regardless, small business owners right now should be thinking about the next 12 months and how they can capitalize on consumer demands which come along with a recession.
Small business owners need to position themselves now for the future. They should budget for balancing the everyday costs of running their businesses and focusing on increased efficiency. However, the most important thing small business owners should be working on now is their mindset. Their mindset should be to play like you are losing. This amplifies consideration of efficiency, effectiveness, and streamlining waste. This also allows small business owners to focus on risk.
The need for business financing.
Without a doubt, the small business financing industry is back after the pandemic. Companies like eNOVA (who owns OnDeck) posted record earnings in 2021. Other small business lenders have pushed forward with earnings and expanded. Credibly, a major small business lender based in Michigan announced that it had secured at $50M credit facility for its small business lending division in July of 2022.
Record profits infers record lending to small business owners. That is, if lenders are lending more than ever, small businesses are taking more than ever. With the return from the pandemic, small business owners need access to capital that not only makes sense, it must be helpful.
Recession-Proof small business financing.
With small business lenders thriving, so are programs which small business owners should be focusing on before the recession hits. While some would indicate that we are already in a recession, with the parity of the Dollar and the EURO the admission of recession appears to be coming soon.
Small business owners need to look at the signs and find financing products which are recession-proof. That is, recession-proof products tend to have the following commonalities:
- The terms allow for cash flow which does not kill profit margins.
- Financing products carry terms which are reasonable. Many times, while rates for longer terms seem to be lower, they are much more expensive because you have the financing longer.
- The product allows you to save while you pay back the financing.
Small Business Grants
Small business grants are free money for small businesses which are provided by government, non-public, and for-profit entities. Most small business grants provide business owners an avenue to apply for a bigger goal. For instance, the US Department of Labor has hosted grants to small businesses in places of high poverty for the development of careers and creation of new jobs.
While it takes time and effort to research and apply for grants, the end game can be worth it as small business grants are funds which do not need to be paid back. However, grants are not always rosy. As I wrote in a recent article:
Purpose – Along with most grants is purpose. That is, grants have purposes. For instance, State grants or Federal grants may focus on a bigger picture such as developing jobs or creating a new product that might help the public.
Restrictions as well as Reporting – Grants have restrictions and reporting requirements which generally ensure that the grant is being used the correct way. Further most grants have time limits for attaining results and reporting those results to an overseeing organization or entity.
Matching Funds – Many grants come along with a requirement for the organization to match the funds from the grant with their business’s funds. Matching funds can be tricky as many small business owners apply for grants with matching funds and do not even know that matching is a requirement.
To help you get started, we always keep and refresh small business grants which are available to small business owners (https://www.backofficedepot.com/smallbusinessgrants).
Term loans
Term loans are easy to apply for and usually provide small business owners terms from 1 year out to 5 years. Approvals are based on underwriting guidelines specific to the industry, amount of loan, monthly revenue, credit score, business credit score, and time in business.
Small business term loans usually have set fixed interest rates and payments can be daily, weekly, bi-weekly, or even monthly. For most term loans under $150K the only documentation needed tends to be an application, business bank statements, as well as proof of business. Some lenders ask for taxes if your funding request is for more than $150,000 or on a case-by-case basis.
Average Range for Borrowing: $1,500 to $550,000
Rate(s): 7% – 38% APR
Credit Score Requirement: 600
To apply for pre-qualification (no credit pull) for a Small Business Term Loan Click Here.
Equipment Term Loans with Rebate
Some equipment loans carry rebates which can be advantageous for small business owners. That is, a
lender will lease to the small business a piece of equipment and provide a rebate at an amount which is parallel to the costs of the equipment loan. For instance, if it is determined that the equipment loan is for $25,000, the equipment is then amortized with interest over 60 monthly payments, without origination or fees. Then, upon receipt of equipment, a rebate is provided for the business owner for the equipment at the amount the equipment costs.
What is beneficial about the loan is that to an extent, equipment is tax deductible under Chapter 179 of the IRS Tax Code so what you are paying back is tax deductible. Also beneficial is that this loan is not one that counts as an MCA position and having a longer term make the payments more affordable than traditional term loans.
Average Range for Borrowing: $20,000 to $100,000
Rate(s): 15% – 20% APR
Term(s): 5 years
Credit Score Requirement: 680
Business Credit Score: Paydex Score of 80
To apply for pre-qualification (no credit pull) for a 5 Year loan click here.
Line of Credit
Lines of credit have the most flexibility. For instance, the beauty of a line of credit is that you only draw what you need when you need to. Applications for lines of credit are fast and have flexible terms.
Range for Borrowing: $1,500 to $250,000
Rate(s): 7% – 28% APR
Term(s): Variable
Credit Score Requirement: 680
To apply for pre-qualification (no credit pull) for a line of credit, click here.
Short Term Loan
Short term loans are those which go from 6 months to 5 years. Most short-term loans have weekly payments and little underwriting requirements. Further, credit is less important and while rates tend to be higher for small business owners, there is minimal paperwork needed and funds can be disbursed in as fast as 1 hour.
Average Range for Borrowing: $2,500 to $500,000
Rate(s): 8.99% – 34% APR
Credit Score Requirement: 450
To apply for pre-qualification (no credit pull) for a line of credit, click here.
Consolidation Loan
Consolidation loans present a host of different options for small business owners who already have debt or would like to combine working capital already taken. There are different consolidation programs available which small business owners can use to ensure that they have the maximum economic performance they can have.
For originators, loan consolidation is an art. There are virtually dozens of ways to consolidate loans which can be helpful. Once you apply, our team will craft an option which provides you a simple, affordable road map for consolidation and beyond.
Average Range for Borrowing: $25,000 to $500,000
Rate(s): 9.0% – 39% APR
Term(s): Up to 3 years
Credit Score Requirement: 500 and up
To apply for pre-qualification (no credit pull) for a consolidation loan, click here.
Equipment or Vehicle Loans
Perhaps one of the best loans small business owners can take is for equipment or vehicles. With relatively low rates, equipment or vehicle loans can be efficient and lower in cost than working capital loans or merchant cash advances. Plus, the benefits are that the loan does not usually go on the business owner’s personal credit and has a longer term, up to 6 years.
Further, many lenders do not count an equipment loan towards working capital loans or merchant cash advances, so small business owners may be able to acquire more capital. Some equipment and vehicle lenders may also provide additional working capital as well.
Average Range for Borrowing: $25,000 to $150,000
Rate(s): 6.0% – 21% APR
Term(s): Up to 6 Years
Credit Score Requirement: 600
To apply for pre-qualification (no credit pull) for an equipment or vehicle financing, click here.
Asset-Based Loans
Asset-based loans are loans that are collateralized with either equipment or real estate. Loans that have collateral attached to it are usually cheaper than regular term loans and less risks for lenders to provide funds.
Asset-based loans for small business owners can be a great way to access lower-cost working capital and the terms can be beneficial as well. Also, asset-based loans usually carry simple monthly interest, which means you pay interest by the month, not the term. If the borrower pays the loan back earlier, they can save on the interest as they do not pay the months that they do not have the loan. This is a similar loan product to a line of credit.
Average Range for Borrowing: $10,000 to $500,000
Rate(s): Simple Monthly Interest (starting at 1.5% per month)
Term(s): Up to 5 Years
Credit Score Requirement: None
To apply for pre-qualification (no credit pull) for an asset-based loan, click here.
Dr. Thomas Tramaglini is the Managing Director for BRP Onesta, a company that supports small businesses. By offering a host of important and affordable services that small business owners tend to not have time to do themselves, the team at BRP Onesta can help small businesses grow infinitely. Although located in on the famous Jersey shore, BRP Onesta serves clients in all 50 states, Puerto Rico, Mexico and Canada.
