Some 100,000 plus Rhode Island small businesses employ nearly 231,000 people, according to the SBA’s 2021 Small Business Profile. Women owned 40% of those businesses, and almost 7% were owned by veterans.
Access to capital is often an ongoing challenge though. The majority of these small businesses have no employees and may find it difficult to qualify for traditional financing such as bank loans. If you’re a business owner in Rhode Island looking for a small business loan, you’ll want to be aware of the many options available so you can find the right one for your business.
How a Small Business Loan Can Help Your South Carolina Small Business
About 74% of startups in Rhode Island make it through their first year in business, according to the Rhode Island Chamber of Commerce. That’s a great start. But business owners want their businesses to thrive for years to come, and to do that, they business will likely need financing at some point.
Just as it’s smart to have a business plan and to update it regularly, having a funding plan is also wise. It can allow the business to plan to borrow strategically for key events like increasing its workforce, building a storefront, creating or expanding an online presence, purchasing or upgrading equipment. And of course financing can also help smooth out cash flow for seasonal businesses, when unexpected costs come up, or when clients pay slowly.
Types of Small Business Loans to Choose From
If you’ve tried getting a small business loan and been turned down, you’re not alone. But don’t give up easily. Even if you don’t think you can qualify because of low revenues or bad credit scores, there may be funding options you haven’t considered.
Here are the most popular types of small business financing:
Lines of credit
For businesses that may need different amounts of capital at different points in time, a business line of credit can be an excellent fit. It will allow your business to have access to a set amount of capital, but choose when and how much to use. Pay back funds and they become available again. Interest is only charged on the amount outstanding. Together, these factors make lines of credit a good short-term financing option for working capital and other needs.
Sometimes you’ll need to invest in a project that will take time to pay off. That’s where term loans come in. Term loans are usually set up so that borrowers will pay them off over the course of 2—5 years. Predictable payments help the small business owner protect cash flow. Some term loans for larger projects can have 15—25 year terms. Term loans from banks or credit unions are likely to carry the lowest interest rates, but may also be harder to get. Term loans from online lenders are often faster and easier to qualify for, but may cost more.
Business credit cards
When you’re thinking of financing, a business credit card may not be the first option that comes to mind. But don’t rule it out. These cards allow a small business to access a line of credit as needed, and pay it back over time. You generally will need good personal credit scores to qualify. Once you get one, though, you will have access to capital for your business for a long time to come.
Commercial real estate loans
A commercial real estate loan can offer favorable terms to those looking for real estate loans. They may be available through banks as well as commercial real estate lenders. There are some SBA loans that may be used for real estate as well.
Equipment financing or leasing
Small businesses in many different industries need equipment of various types. Equipment financing or leasing can be a way to acquire equipment without significant out of pocket costs. In addition to preserving cash flow, leasing can also offer tax benefits. If you decide to go the equipment leasing route, you may be able upgrade when new equipment comes out.
Crowdfunding has exploded in popularity in recent years. One reason is that crowdfunding can be extremely flexible. Some crowdfunding platforms help small business owners get loans, and many more allow businesses to get investors or to offer products/rewards to backers. This can be a win-win for both sides, as backers or investors get to be part of a company they love, while the entrepreneur gets funding and loyal fans. Crowdfunding is available to both startups and existing businesses.
Invoice factoring or financing
Small businesses that sell goods or services to other businesses and struggle to get financing may want to look into invoice factoring or financing. With invoice factoring or financing you simply sell your invoices to a third party company at a reduced rate and they will then make their money by collecting the full invoice amount from the company that owes your business money. Alternatively, invoices may be used as collateral for short-term loans. This may not be the best long term financing solution for your business, but it can help get you money quickly and with less hassle than other loan options.
Business cash advance
A business cash advance or merchant cash advance is not technically a loan. Rather a company will look at your business’ past revenues and advance payment against future revenues. Since the company is looking at business revenues, good personal credit scores aren’t necessarily required, which can make this a favorable option for those that struggle to get financing because of credit. It’s one of the fastest types of financing, but it can also be expensive.
If you don’t need a very large loan, you may want to consider microloans. These tend to be smaller loans, though some can go up to a couple hundred thousand dollars. (The SBA Microloan program goes up to $50,000.) Many of these loans are meant to help business owners who might otherwise struggle to get financing. They usually come with favorable terms, require little or no collateral required, and provide technical assistance such as mentoring for the business.
Examples of microloans in Rhode Island include:
- Rhode Island Commerce Small Business Loan Fund (SBLF) which provides up to $500,000 (secured loan) for working capital to existing manufacturing, processing, and selected service businesses.
- The East Providence Commercial Microloan Program is intended to finance startup expenses, operating expenses and/or to purchase assets for businesses with ten (10) or fewer employees, which are unable to obtain a loan through banks and other commercial lending sources. Loan amounts are between $1,000 and $10,000.
The U.S. Small Business Administration has several loan programs designed to help qualified small businesses get financing. Most SBA loans are made through lenders, except for Disaster Loans (including the Economic Injury Disaster Loan) which are made by the SBA. For Disaster Loans, you apply at SBA.gov. For all others, you apply at participating lenders. (The Paycheck Protection Program or PPP loans are SBA loans made to businesses impacted by the coronavirus pandemic. However, that program is closed.)
Small Business Loan Options for Rhode Island
If you are a Rhode Island small business owner looking for a loan, you may want to talk with local lenders including banks or credit unions. But if a bank loan is not available, there are more loan options to consider:
Line of credit
Commercial real estate loans
Equipment financing and leasing
Business cash advance
What it Takes to Get Approved for a Small Business Loan
After reading about all these loan options, you may be wondering what it takes to qualify. Each lender will have its own qualification requirements, but there are typically four main things they may take into account:
- Business revenues
- Credit scores
- Age of business
Hopefully your business financials are in order because you may need them when you apply for a loan. Almost every lender will want to see business bank statements to verify your business income. Some lenders may also want to review financial statements and/or business tax returns to understand the overall health of the business. Using a business bank account and keeping your bookkeeping up to date will make this part of qualifying for a loan less stressful.
Your credit score isn’t just going to affect your personal financial life, it can also impact your business. When you apply for a business loan, many lenders are going to run your credit. Having a good credit score can bolster your chances of getting a loan, just like having a bad credit score can hurt your chances of getting a loan.
Make sure you know what your credit scores are before you apply. If you need a loan and don’t have time to improve your credit score make sure you look into financing that may not require good credit such as business cash advances, factoring, crowdfunding and some microloans.
Many people think that if they have good credit scores and solid business revenues they will be able to get any loan they want. While those qualifications will definitely help, the industry their business is in will also affect their loan options. Certain industries are classified as “restricted industries” by lenders and businesses in these industries will not be funded. Industry may be listed on the business credit report as NAICS or SIC codes.
Age of business
Businesses that have been around for two years (or longer) will find it easier to get a loan than younger businesses. Of course there are other factors that will be considered, but everything else being equal, a 3-year old business will probably have an easier time getting financing than a 3-month old business.
How to Choose the Right Loan for Your Rhode Island Small Business
Now that you know what some financing options are, and what it generally takes to qualify, you have to decide which loan (or financing) is right for your business. There’s no one-size-fits-all answer, but there are some important points to consider:
- How quickly do you need financing?
- How do you plan to use the funds?
- How quickly will you pay it back?
- What is the cost of the financing?
- Which types of financing does my business qualify for?
This can feel overwhelming but if you start exploring options before you are desperate for funds you’ll have more time to evaluate possible options.
Small Business Grant Options for Rhode Island
Small business owners may not feel ready to get a loan for any number of reasons, and may instead seek out grants. Grants offer money that doesn’t have to be paid back, which makes it very appealing to many small business owners.
But grants should not be your primary funding for your business. Covid relief grants aside, most small business grants are often highly competitive and the process of securing one can take months. If you win a grant, that’s great. But you can’t count on a small business grant to pay the bills.
Government resource partners (see the section below) can also alert you to grant opportunities especially when it comes to state or local grants.
The RI Rebounds Small Business Grant Program, for example, provided direct financial assistance (grants for either $2,500 or $5,000) to businesses in Rhode Island that suffered financially due to the COVID-19 pandemic. That program closed February 15, 2022, but the state may provide other initiatives check out the RI Commerce website in the resources below.
Businesses interested in exporting can explore Export Promotional Grants, which can pay for a variety of expenses related to exporting.
Additional Resources for Rhode Island Small Businesses
There are many free and low-cost resources available to help your Rhode Island business succeed.
Rhode Island Commerce
Start your search for business resources at the Rhode Island government’s site, Commerceri.com. There you’ll find a variety of resources for both starting and growing your business, including information about government contracting, international trade, start up assistance and more.
Rhode Island Small Business Development Center
If you haven’t reached out to the Rhode Island Small Business Development Center (RISBDC), put it at the top of your to do list. SBDCs are there to help you through your small business journey. You can sign up for one-on-one mentoring, webinars, online classes, and so much more through your local SBDC. They even offer a legal clinic that provides a 30-minute free consultation with a volunteer attorney.
Rhode Island Black Business Association
Black small business owners may want to consider becoming a member of the Rhode Island Black Business Association. They are a non-profit association trying to help Black-owned and minority businesses succeed. RIBBA offers training to entrepreneurs, business development programs, workforce development programs, and advocacy.
Small Business Administration
The U.S. Small Business Administration offers a wealth of resources to small businesses. The Rhode Island District office is in Providence. The SBA’s website and SBA resource partners provide local assistance, an online learning platform, guides for different questions and topics, plus so much more. Whether you need help starting your business, or are looking for resources to grow your business, the SBA can help with free resources.
This article was originally written on March 14, 2022 and updated on March 21, 2022.