Just over half a million small businesses call Minnesota home, and they employee over 1.2 million people. Almost half the state’s jobs are due to small business employers according to research by the SBA’s Office of Advocacy. As with many businesses across the country, access to capital is an ongoing concern for Minnesotan businesses. The number of banks in the state has declined and that means fewer options for small business loans.
There are a number of financing programs available for businesses based in Minnesota, if you know where to look.
How a Small Business Loan Can Help Your Minnesota Business
Small business loans are an essential tool for both new businesses as well as those in growth mode. They can be used for a variety of purposes:
- Working capital
- Marketing and advertising expenses
- Equipment purchases and leasing
- Business vehicle financing
- Commercial real estate (acquisition or renovation)
Having access to capital when the business needs it means the business owner can focus on the business. But the reality is many business owners wait until they need funds immediately, rather than planning ahead. Researching business loan programs before you need funds will give you a much better chance of securing the best small business financing.
Types of Small Business Loans to Choose From
There are many different financing options available to small business owners in Minnesota. If you aren’t familiar with these, don’t worry. We’ll explain them in more detail shortly. They are listed here in alphabetical order.
- Business credit cards
- Commercial real estate loans
- Equipment financing and leasing
- Invoice factoring and financing
- Lines of credit
- Merchant cash advances
- SBA loans
- Term loans
- Vendor and supplier financing
Small Business Loan Options for Minnesota
Here we’ll expand on the list of small business financing options to help you choose the right financing for your business.
Business Credit Cards
Small business credit cards offer access to credit in a few ways. You can charge business expenses to the card and get extra time to pay for them without paying interest (as long as the card carries a grace period and you pay in full). In addition, some cards allow you to pay off certain purchases over time. Finally, there are credit cards that offer 0% introductory APRs that can give you anywhere from 6-18 months to pay for purchases interest-free.
Commercial real estate loans
If you want to buy real estate for your business, a commercial real estate loan will likely be essential. There are SBA loans that can also be used for commercial real estate as long as the business occupies at least half or more of the location (specific requirements vary).
In 2020, Minnesota’s 25 most successful crowdfunding campaigns raised $7.1 million, almost $2 million less than the year before according to data in BizJournals. Those are only the top campaigns. Many businesses raised even less.
- Rewards-based crowdfunding lets you presell a product or offer tangible rewards to those who contribute to your campaign
- Debt-based crowdfunding allows you to get a loan from a platform funded by multiple lenders
- Investment or equity-based crowdfunding allows businesses to raise up to $5 million from investors
Note that in addition to federal regulations, Minnesota regulates investment/equity crowdfunding under the MNvest Securities Registration Exemption (MNVest).
Not all campaigns are successful, and you will need to invest in strong marketing and outreach. Get a free cheatsheet of crowdfunding platforms at Crowdfundbetter.com.
Equipment financing and leasing
If your business needs equipment of any type, you may be able to preserve cash flow by leasing or financing everything from heavy equipment like trucks and manufacturing equipment to laptops or furniture.
If your business owns equipment outright, you may be able to lease it back to for cash. Certain types of leases offer tax benefits.
Invoice factoring and financing
If your customers or clients are other businesses (B2B) you can get paid faster with invoice factoring, or use those invoices to secure financing. This is a type of short-term financing and costs vary widely but can be expensive.
Lines of credit
A line of credit is one of the most popular types of short-term financing for small businesses. The business will have a certain amount of financing available, and can draw against the credit line as needed. Interest is charged on the outstanding balance.
Merchant cash advances
Businesses that have steady sales in the form of credit or debit card sales, or sales through online platforms, are often good candidates for merchant cash advances or business cash advances. This type of financing offers an advance against future sales based on past sales volume. Credit is much less important than revenues, but the cost can be high.
If your business needs a smaller amount of money, a microlender may be your best bet. (Many traditional lenders don’t make small loans.) The loan amount can range from a few hundred to several thousand dollars. Many microlenders are nonprofit organizations dedicated to economic development and increasing access to capital for underserved entrepreneurs. There is also an SBA microloan program offering loans of up to $50,000, though the average loan size is much smaller. These loans also come with technical assistance, which means they will provide services to help ensure the business is successful and able to repay the loan.
With more than ten different SBA loan programs, you may find a loan program with attractive interest rates and repayment terms. 7(a) loans are the most popular, while the CDC 504 loan program can be especially helpful for real estate acquisition and expansion.
SBA loan programs are designed for businesses that can’t get similar credit elsewhere. Most SBA loans are made by participating lenders (not the U.S. Small Business Administration) and will require good credit and a personal guarantee, along with some kind of down payment (called “equity injection.”). Disaster loans are the only type of loan made directly to borrowers by the SBA.
Borrow a fixed amount of money and pay it back over a set repayment period, usually 2 – 5 years, though some term loans can extend to 20-25 years. This type of financing is excellent when the business has a specific project to finance, and needs time to realize the return on investment.
Vendor and supplier financing
This type of financing is short term as vendors will often provide net-30 terms (meaning payment is due in 30 days). Still it can be helpful for cash flow, especially if you can realize a sale in less than 30 days and pay the balance out of cash flow. Check with your suppliers or visit Nav.com/vendors to find easy net-30 vendors.
How to Choose the Right Loan for Your Minnesota Small Business
To choose the right business loan, you need to clarify several things upfront:
- How much do you need to borrow?
- What is the loan purpose?
- How long do you need to borrow?
- Do you have adequate cash flow to make periodic payments?
Once you’ve answered those questions, you can then look for financing that meets your needs. But you’ll also need to understand which types of loans you qualify for. And if you can’t answer these questions, take advantage of the resources listed later in this article .
Tip: A small business marketplace like Nav can help you understand which small business financing options you are most likely to qualify for based on your credit, revenues and other data.
What it Takes to Get Approved for a Small Business Loan
Every lender has its own qualification requirements, but most will take into account these main factors:
Revenues: Lenders want to make loans that will be repaid and strong revenues are one of the best indicators this is likely to happen. Traditional lenders may require business tax returns and financial statements, but most lenders will look at business bank statements to verify revenues.
Credit: Borrowers can often expect a credit check. That may include personal credit scores, business credit, or both. Strong FICO scores will help you qualify for more options.
Time in business: Businesses that have been around for at least two years will have more options than those that are brand-new. Startup small business loan options are fewer than those for established businesses.
Industry: Most lenders prefer to lend to businesses in certain industries, and will not lend to businesses in what they often refer to as “restricted industries.” Your business NAICS or SIC code will often be used to determine the industry, so check your business credit reports to make sure yours is listed accurately.
Not all business loans have the same requirements. If you have bad credit, for example, you may be able to get a loan that doesn’t typically require good credit scores. Merchant cash advances, invoice factoring and crowdfunding are three examples.
Small Business Grant Options for Minnesota
One of the hardest parts of starting a small business is finding your ideal customers and clients. It takes work to find companies or individuals willing to pay for what you sell. The same is true— and even more so— when it comes to getting a small business grant.
Grants offer money that does not have to be repaid. They are competitive and some will require hiring a professional grant writer. Nevertheless, this may be an option worth pursuing for some businesses.
The US Government does not give free money to start a business. Read the Minnesota Employment & Economic Development Agency warning about small business grants here.
Additional Resources for Minnesota Small Businesses
A number of organizations are eager to help Minnesota small businesses succeed. Whether your business is located in a rural part of the state or in a major city like Minneapolis, you can find free help through the following SBA Resource Partners:
Minnesota Network of Small Business Development Centers (SBDC) has nine regional offices (including Twin Cities metro) and many satellite centers. Get free consulting for your existing business in a variety of areas including business expansion and growth, as well as help starting a new business in Minnesota. SBDCs can also help create a business plan that may help the business secure financing.
SCORE offers free mentoring programs for entrepreneurs. Find a SCORE mentor here.
The Minnesota Small Business Office is another excellent resource, and offers guidebooks as well as consultative services.
This article was originally written on January 27, 2022.