For the more than half a million small businesses operating in Indiana, cash flow can be an ongoing challenge. Manufacturing, healthcare and social services, accommodations and food service, and retail trade are the top industries for self employment in the state according to research published by the SBA Office of Advocacy. May have been impacted by the coronavirus pandemic.
Small business loans and financing can be essential for these businesses, both to manage fluctuating revenues and expand their businesses. Here are financing options to consider.
How a Small Business Loan Can Help Your Indiana Business
There are myriad ways small businesses use financing in their day-to-day operations.
Small business owners may use a line of credit to make sure business expenses get paid while they wait for payments from customers or clients. Or they may turn to invoice financing or factoring to get money owed by clients more quickly.
They may turn to commercial real estate loans to purchase real estate for the business. Term loans may help with the costs of remodeling or expansion expenses.
Short-term loans may be used to purchase inventory and equipment financing may be used to acquire equipment to fund the next phase in growth.
In other words, the possibilities are many but finding the right small business financing option is essential.
Types of Small Business Loans to Choose From
Business owners will have many choices when it comes to financing. Here are the top types of financing used by business owners. We will explain these in more detail shortly.
- Lines of credit
- Term loans
- Business credit cards
- Commercial real estate loans
- Equipment financing and leasing
- Invoice factoring and financing
- Merchant cash advances
- Vendor and supplier financing
Qualifications for a Small Business Loan in Indiana
Most business lenders will review loan applications for these qualifications:
Good or Excellent Credit
Not all lenders require good credit, but many do. A personal credit check is common and lenders may require good credit scores (650-680 FICO or higher) or excellent credit (700 or higher). Some lenders also check business credit.
Every lender’s minimum income requirements vary, but it’s not uncommon for some to require at least $5000- $10,000 in average monthly revenues. Some lenders have minimum annual revenue requirements of $150,000 or more. Check with the lender to determine whether you meet minimum income requirements.
1-2 Years in Business
Most lenders prefer to lend to businesses with an established track record. It’s not uncommon for lenders to only do business with firms that have at least two years in business, though some may fund younger businesses— including startups. New businesses must often demonstrate experience in the industry and a personal guarantee.
A NAICS or SIC code is used to identify the industry of the business. Lenders may lend to businesses in certain industries but not others. It’s important to understand a lender’s list of restricted industries to determine whether yours will be considered. And check your business credit: if your NAICS or SIC code on your business credit reports is wrong you may not get the offers you’d get otherwise.
Small Business Loan Options for Indiana
Here are the most popular types of small business financing, along with examples of how they may be used.
Line of Credit
Get access to financing up to a specific amount and pay interest only on the amount you owe. Lines of credit offer short-term financing for inventory, working capital and cash flow.
Borrow a specific amount of money and pay it back, typically with monthly payments for 2— 25 years. Term loans are useful for funding specific projects.
Commercial Real Estate Loans
Finance commercial property for the business, or to rent/lease to other businesses.
Business Credit Cards
Get a line of credit accessed with a small business credit card. Those with low interest rates (including 0% APRs) provide a line of credit that can help the business when cash flow is tight.
Acquire equipment for the business without depleting cash reserves. Leases may also offer tax benefits.
Get paid faster on outstanding B2B invoices or use invoices as collateral for financing.
Business Cash Advance
Get an advance against future sales. Available to businesses with strong sales. Credit score requirements are often flexible.
Smaller loans of as little as $500 to $50,000, often made by nonprofit Community Development Financial Institutions aiming to help underserved businesses access capital. Lenders may be more flexible when it comes to credit history.
SBA loans include over ten loan programs ranging from popular 7(a) loans (which included PPP) to SBA Microloans. Only Disaster Loans (including Economic Injury Disaster Loans) are made directly by the U.S. Small Business Administration. Instead, loans are made by participating lenders with an SBA guaranty.
Vendor and Supplier Credit
Vendors or suppliers allow customers to purchase goods or services and pay for them later, usually on net-30 terms which means payments are due in 30 days. Helpful for short-term cash flow.
Financing obtained by pitching prospective lenders through online platforms. Can be in the form of debt (loans), equity (investment in the business) or rewards (such as products).
How to Choose the Right Loan for Your Indiana Small Business
Choosing a small business loan involves a few steps. You need to think carefully about how much you need to borrow and how you’ll use the funds to grow your business. You’ll want to match the use of funds with the right type of loan. For example, you wouldn’t use a five-year term loan to finance inventory, and you wouldn’t use a business credit card to finance equipment.
Another important consideration is which types of financing you will qualify for. A brand new startup will find it challenging to get an SBA 7(a) loan, especially if the applicant doesn’t have good credit. There’s no point wasting your time trying to get a loan if your business doesn’t meet the lender’s minimum loan requirements.
Where to Look for Small Business Loans in Indiana
When shopping for a small business loan, you have several options:
Banks and credit unions often offer the best rates. Lender requirements vary, but typically the loan application process can take several weeks or longer. Traditional lenders often require good to excellent credit, at least two years in business, and documentation of revenues including business tax returns and financial statements.
Online lenders often offer fast loan decisions. Businesses can often get a quick preliminary decision then supply supporting documentation, such as linking a business bank account to verify revenues, to get approved within hours or days. Costs will likely be higher than banks and product mix may be limited.
Brokers help business owners shop for loans but will not be required to present the best available financing to the borrower. Broker fees aren’t often clearly disclosed.
Marketplaces help business owners by matching them to lending options for which they are more likely to qualify. Can make online loan shopping faster and more efficient.
Small Business Grant Options for Indiana
Small business grants may be available from several sources:
- Federal government
- State and local governments
- Private organizations
Finding and getting a small business grant requires work to identify potential grants for which the business may qualify, and then applying for the grant. Government grants often have detailed application requirements. However, if the business is successful in getting a grant, those funds will not have to be repaid. Get resources for finding and securing small business grants here.
Additional Resources for Indiana Small Businesses
Business owners can take advantage of a number of excellent business resources in the state of Indiana. A great place to start is with SBA Resource partners including:
- Indiana Small Business Development Centers (SBDCs): These professionals provide free mentoring and free or low-cost educational resources to help businesses in the Hoosier state succeed. Find your local SBDC here.
- SCORE mentors in Indiana: Volunteer mentors work one-on-one with those starting or growing businesses in Indiana. Mentoring is free. Find a SCORE mentor here.
Indiana Community Development Financial Institutions (CDFIs) help promote community development in distressed urban and rural communities. CDFIs make loans (including microloans and commercial real estate loans), investments, and/or provide technical assistance to entrepreneurs. Find an Indiana CDFI here and check out the Indianapolis CDFI Collaborative here.
The Indiana Economic Development Corporation offers programs and initiatives that include support and expertise to companies investing and creating jobs in Indiana. The Capital Access Program encourages lenders to make loans they would not otherwise make.
This article was originally written on January 24, 2022.