Alaska businesses and small businesses are practically synonymous, as 99.1% of firms in Alaska are small businesses. Together, these small employers contribute to just over half of the state’s employment, according to the SBA Office of Advocacy. But they’ve faced serious challenges the past couple of years, including the pandemic’s effect on their businesses, the rising cost of goods, as well as severe supply chain and hiring challenges.
For many businesses based in Alaska, securing small business financing continues to be a challenge. Fifty-one percent of small business owners who responded to the 2021 Annual Small Business Survey Report by the Alaska Small Business Development Center reported it would be difficult to raise capital.
When asked, “What would make it easier to raise capital for your small business?” the top three responses were “Central place to learn options, increased profitability and more non-traditional financing.” Here we’ll explain small business loan options and how to qualify.
How a Small Business Loan Can Help Your Alaska Small Business
Small business loans can provide much-needed capital for businesses, whether they are trying to recover from the pandemic, are in a growth phase, or are even just getting started. Funds can help businesses hire staff or increase pay, invest in inventory, purchase or upgrade equipment or invest in marketing as a few examples.
Short-term financing can be particularly helpful to businesses experiencing a temporary cash flow crunch due to seasonal fluctuations in sales or short-term supply chain interruptions, for example, while long-term financing can be used to expand to a new location, invest in equipment or make other large purchases.
Types of Small Business Loans to Choose From
A previous report by the Alaska SBDC found that 21% of business owners looking for financing would seek loans from banks. While these loans often come with very good terms, many businesses won’t qualify for traditional bank loans. It’s important to understand all your options so you don’t overlook ones that may be accessible to your business.
Here is a quick rundown of some of the top loan options for small businesses:
Business credit cards
If you have a good personal credit score/business credit score and sufficient income (from any source) you are probably a great candidate for a business credit card. The advantage of a business credit card as a financing option is that they let entrepreneurs access capital quickly, benefit from perks like travel rewards or cash back, and many times they help you build business credit.
Lines of credit
If you’re looking for flexible, short-term financing available when you need it, a line of credit may be a good option. With a line of credit you receive a set amount of credit (the credit line) and you can use as much or little of it as you need. You will pay interest on the money you borrow, and once you pay the funds back you can access it again.
If you have a specific project for which you need financing, for a term loan may be a great option. Term loans work like a traditional loan: you will have a specific repayment schedule and will make payments for a set period of time— usually 2-5 years or more. Some term loans (including certain SBA loans) can extend to 20—25 years.
Commercial real estate loans
A commercial real estate loan is a very specific type of loan, but it is a great option for its intended purpose which could include opening a bricks and mortar location, expanding a current location or building a manufacturing facility for example.
Equipment financing or leasing
Equipment financing or equipment leasing can be an excellent option when you are looking to invest in equipment. Both help preserve working capital for other purposes, and equipment leasing in particular may offer certain tax benefits which can be quite beneficial.
Invoice factoring or financing
Invoice factoring or financing can be a fast financing option for businesses that invoice other businesses. If you typically sell goods to other businesses and need financing you can sell your invoices to a third party at a discount to get funds more quickly for your business.
Merchant cash advance
For business owners who have a history of strong sales (often via credit and debit card sales or online sales) a merchant cash advance or business cash advance can be a very fast way to get financing. This type of financing advances funds based on past revenue. Payments are then made on a daily, weekly or (rarely) monthly basis. It can be quite a bit more expensive than other types of financing, however.
Crowdfunding can be a terrific option for both startups and existing businesses with an appealing product or business idea. There are several types of crowdfunding worth considering.
Rewards-based crowdfunding allows the business to offer a tangible reward (such as a product) in exchange for funds. Investment or equity based crowdfunding allows the business to get investors to fund up to $5 million. Debt-based crowdfunding offers loans, while donor-based crowdfunding solicits donations.
Microloans are small loans, usually made by nonprofit organizations. They are often targeted to borrowers who have difficulty getting funded. Loan amounts often go up to $50,000 at terms that include predictable repayment schedules and competitive interest rates. Plus these loans usually come with mentoring.
The U.S. Small Business Administration offers nearly a dozen SBA loan programs, ranging from microloans to multi-million dollar 7(a) loans and the CDC 504 loan program. For the most part, the SBA doesn’t make loans. Instead it guarantees loans made by participating SBA lenders. (One exception: Disaster loans are made by the SBA directly and you’ll apply at SBA.gov.)
Small Business Loan Options for Alaska
If you are an Alaska small business owner, you can certainly explore local lending options such as local banks and credit unions. One worth checking out is Alaska Growth Capital, a nine-time SBA Community Lender of the Year, and a Native-owned certified Community Development Financial Institution (Native CDFI).
In addition, you may want to consider these lenders:
Commercial real estate loans
Equipment financing and leasing
Merchant cash advance
Business credit cards
What it Takes to Get Approved for a Small Business Loan
There are three main eligibility factors that many lenders typically evaluate when considering a business loan application:
- Business revenues/financials
- Credit scores
- Age of the business
No matter what type of loan you decide to go for it is important to have your financials together. Many online lenders will rely primarily on your recent business bank statements to determine whether you meet their revenue or financial requirements, so make sure you are using a business bank account. Traditional lending institutions such as banks or credit unions may also require business tax returns and/or up-to-date financial statements.
Having a good credit score is important when looking at small business financing options. While not having a good credit score won’t necessarily prevent you from getting financing, it will limit the financing options available to you. If your credit scores are not great, you may want to explore merchant cash advances, invoice factoring, microloans or crowdfunding.
Age of business
The magic number for this factor, time in business, tends to be two years in business. If your small business has been around longer than that, great. If your business has not hit that two year mark, you may have more limited options but there are some lenders who will work with you, especially if revenues are strong.
It is really important to understand that even if you have a great credit score, strong revenues, and a well-established business you may still be turned down for financing. This is because lenders will lend into some industries and not to others. Your industry is usually based on your SIC or NAICS codes, both of which may appear on your business credit reports.
What Loan is Best for Your Alaska Small Business
Alaska is a unique state with challenges businesses in other states don’t encounter, and your Alaska business is unique as well. That means there is no one loan option that will be right for every business. Still there are some common questions you should consider as you choose the right type of financing. Those include:
- How you plan to use your loan (use of funds)
- How long you need to pay it back (loan term)
- How quickly you need financing
- How much you can afford to pay
- The cost of the financing, and how that impacts ROI
Most importantly, you’ll need to consider the types of financing for which you qualify so you don’t waste time applying for financing that’s not available to your business.
Small Business Grants for Alaska
Small business grants are desirable for one main reason: they provide funding the entrepreneur doesn’t have to pay back. While grants are appealing, they require work. It takes time and effort to find and identify grant opportunities.
Grants may be available from federal, state or local government agencies, as well as through businesses or foundations.
Due to the competitive nature of small business grants it is not a great option to rely on them exclusively for your financing. After all, there is no guarantee you will be awarded the grant. That doesn’t mean you should rule them out; but make sure you are also looking into other financing options as well.
There are several places to search for grants, including Grants.gov (for government grants) and grant search platforms such as OpenGrants.io or GrantWatch.com. Organizations such as the Alaska SBDC and SCORE may offer information about grants including COVID-19 relief programs and grants, and how to apply for federal research and development grants.
Additional Resources for Alaska Small Businesses
Alaska Small Business Development Center
The Alaska SBDC offers a range of resources to entrepreneurs, including no-cost, confidential, one-on-one business coaching, free and low-cost workshops, business plan creation, help with government contracts and more. As an SBA resource partner, they are dedicated to helping businesses in Alaska grow.
It has offices in Anchorage, Fairbanks, Juneau/Ketchikan, Kenai and Matsu, but can help businesses across the state of Alaska, even in rural areas.
Juneau Economic Development Council
The Juneau Economic Development Council offers a number of programs including the Alaska Angel Conference. Alaskans in Southeast Alaska can take advantage of the many economic and business resources they provide.
Get free mentoring for your business through SCORE Alaska. SCORE mentors provide business owners with free business and confidential business counseling.
This article was originally written on February 24, 2022.