5 Small Business Financing Trends to Watch
Entrepreneurs, fasten your seat belts. Whether you're starting up your dream business this year or managing your established small company, 2016 will be a rollercoaster ride of potential opportunity — and pitfalls. Here are five trends to watch closely so you can jump on or off at the right time for your business:
1. The online lending market will grow – but unwary borrowers beware!
The online lending sector of the financial technology (fintech) industry exploded in 2015 and shows no signs of slowing down this year. These lenders attract entrepreneurs by offering faster, more streamlined application processes than traditional banks. They are a true market disruptor: who doesn't want to fill out an online form and get loan approval mere hours later?
But be careful. These online lenders aren't regulated the same way as banks, and you need to read the fine print carefully. Generally, these lenders focus on merchant cash advances (with a payment arrangement that takes weekly or even daily dips from your incoming cash) or working capital loans with repayment front loaded into the first few months of the loan term. Their terms may be unclearly stated, and unsophisticated borrowers can find themselves on the hook for as much as 30 to 80 percent in rates and fees.
Online lenders have a place in the business landscape: they pressure traditional banks to pay more attention to small businesses and startups, and they can help you kick start your new business or put operational upgrades in place. There is already a movement afoot for lending organizations and financial service firms to support a Small Business Borrowers' Bill of Rights. But until standards are in place, make sure you're crystal clear on the APR and cash flow implications of any loan you take out online.
2. Banks will edge back into the (small) lending business
And it's about time. Lower-dollar business loans have dwindled in the last ten years, even as Small Business Association funding caps have risen. In 2015, 79 percent of SBA loans were greater than $350,000, and most big banks would only consider applications from businesses with a minimum two-year financial track record. That left a lot of entrepreneurs out in the cold.
In 2016, thanks in part to the market threat presented by the booming fintech industry, traditional banks will ease back into lower-dollar lending and will explore alternative funding options. Karen Mills, former SBA chief, expects banks to move towards greater online automation themselves, and perhaps even partner with online lenders.
Since the SBA only guarantees loans through traditional banks, anything those banks do to open up to smaller businesses is good news for everyone.
3. The SBA has plenty of money to fund your business in 2016, but watch those rates.
SBA approved $23.6 billion in business funding in 2015, and the 7(a) funding cap for fiscal year 2016 is currently set at $26.5 billion. SBA loans are still the resource of choice for many entrepreneurs (my company, Guidant Financial, saw a 200 percent increase in SBA lending services last year). SBA is out in front of most traditional banks with its online application process and continues to streamline their processes.
But do your math, and keep a close eye on the Fed. SBA loans are variable and reset quarterly: with a volatile worldwide stock market and potentially rising interest rates in 2016, these loans will become more expensive than in the past 5–7 years.
4. Boomer entrepreneurs' usage of 401(k) business financing will continue to climb.
These owners are often in the enviable position of having ample retirement savings that they can use to fund a new business without tax penalties. The Rollover as Business Startup (ROBS) strategy can fully fund their business, or work as an equity injection in conjunction with a traditional SBA loan. This strategy has been in use for over a decade and has become increasingly popular since 2008. With rising interest rates, this popularity will only increase as ROBS does not have traditional loan fees associated with it, nor is it affected by the stock market.
The advantages of ROBS? Avoiding the higher costs of alternative lending or traditional loans, and providing the equity reassurance to loan underwriters, even in the absence of a two-year track record of business. But as with any investment, ROBS can be a risk. Canny entrepreneurs will make sure their business plans are rock-solid, and then put their retirement funds back to work.
5. Get ready for business to hit the brakes in August through early November.
It's common for presidential elections to derail the momentum of the economy as candidates make undeliverable promises or dire threats, and Congress freezes like a deer in headlights. Already, small business owners' confidence is wobbling and may result in self-imposed delays in startups or acquisitions.
We'll know more about the potential benefits or challenges for small business when clear candidates emerge and take specific positions on issues like tax changes, industry regulation and health care.
There's a lot to keep your eye on in 2016. But for entrepreneurs who build and execute solid financial and operational plans, and keep a clear eye on their funding options, 2016 can be a banner year. Remember that opportunity always feels like a rollercoaster. Buckle up and enjoy the ride!
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