Business Loans and Financing Options for California Companies
California is home to over 4 million small businesses, representing 99.8% of all businesses in the state. Access to financing is critical for companies to start up, operate, and grow. This article explores the various business loan and financing options available for California companies.
Bank Loans
Banks provide some of the most common types of financing for small businesses. Bank loans typically have lower interest rates and better terms compared to some online lenders. However, they also tend to have stricter eligibility requirements.
-SBA Loans
The Small Business Administration (SBA) guarantees loans made by lending institutions to small businesses that would not otherwise qualify for conventional loans. The most popular SBA loans are the 7(a) and 504 loan programs.
According to redditors on r/smallbusiness, SBA 7(a) loans have helped many California entrepreneurs secure financing to start or expand their business when they did not qualify for regular bank loans. One user said, “I used an SBA 7(a) loan to buy out my partner. It was easy to apply through my bank and took less than 2 months to get approved.”
Commercial Real Estate Loans
Banks provide loans to purchase or refinance commercial property like office buildings, retail space, warehouses, and land. The SBA 504 loan is a common choice that provides up to 90% financing for commercial real estate.
According to one Quora user, “I used an SBA 504 loan for my machine shop in LA. It allowed me to purchase the commercial property with just 10% down payment.”
-Equipment Financing
Banks also offer funding to purchase equipment – often through a lease or loan. According to LawInfo, the advantage of leasing is that you can conserve working capital and take the equipment expense off your balance sheet.
Alternative Online Business Loans
Online alternative lending has grown rapidly in recent years. Online lenders provide fast small business funding through various loan products including:
- Term loans – Lump sum payment with fixed monthly payments over 3-5 years
- Lines of credit – Revolving credit that can be tapped as needed
- Invoice financing – Funding against unpaid customer invoices
- Merchant cash advances – Funding in exchange for a percentage of future credit card sales
While online loans are easier to qualify for, interest rates are often higher, ranging from 7% to 60% APR compared to 3% to 8% for bank loans.
According to FindLaw, term loans and lines of credit are lower risk financing options with more transparency while merchant cash advances can be extremely expensive.
Government Grants
The government offers numerous grants for small businesses on both federal and California state level. These grants provide funding that does not need to be repaid, unlike loans. Most grants are targeted for specific purposes like research, development, technology, exports and more.
-According to Avvo, government grants can be extremely helpful for certain qualifying companies, but are highly competitive to qualify for.
Some popular California grants include:
- California Capital Access Program (CalCAP) – Encourages bank lending to small businesses
- California Competes Tax Credit – Income tax credit for job creation
- California Sales and Use Tax Exclusion – Sales tax exclusion for manufacturing equipment
Venture Capital
Venture capital (VC) funding involves investing equity in small businesses with exceptional growth potential in exchange for a share of future profits. According to users on Quora, VC is extremely difficult to qualify for but “can provide startups millions in growth capital if they have a strong management team and product market fit.”
-Some top California VC firms include Sequoia Capital, Benchmark, Greylock Partners, and Upfront Ventures. VC funding is concentrated in technology startups located in Silicon Valley and Los Angeles.
Angel Investors
An angel investor is a high net worth individual who invests their personal capital in startups in exchange for equity ownership. Angel investors are usually found through networking or pitching at events hosted by groups like Keiretsu Forum and Tech Coast Angels.
According to Avvo, angel investment can be easier to qualify for and has fewer restrictions than VC funding, but still requires demonstrating high growth potential. The key is having a strong business plan and financial model.
Peer-to-Peer Lending
Peer-to-peer (P2P) lending connects business owners directly with individual and institutional investors online. By bypassing traditional financial institutions, interest rates can be lower for borrowers while offering attractive returns for investors.
According to FindLaw, the top P2P lending platforms for small business loans include LendingClub, Funding Circle, and Ondeck. Loan amounts on P2P sites often range from $5,000 to $500,000.
Invoice Factoring
With invoice factoring, a business sells its unpaid customer invoices to a commercial finance company to receive immediate funding. Companies can receive between 70-90% of the invoice amount, with the balance paid minus fees after the customer pays their invoice.
According to Entrepreneur magazine, invoice factoring allows you to grow your business faster by improving cash flow to cover operating expenses. However, it can also be more expensive than traditional bank loans if used long-term.
Bottom Line
Access to capital is essential for California businesses to start, operate, and expand. While getting a loan from a bank with low interest rates is ideal, many small businesses do not qualify. The good news is there are a wide variety of alternative funding options available, from government grants to online loans to equity financing.
With the array of choices today, it’s important to thoroughly research each type of financing to find the best option that aligns with your business goals and qualifications. Partnering with an experienced business lending advisor can also help navigate the process to secure funding successfully.
Resources
Articles
- Small Business Loans 2023 (NerdWallet)
- Startup Business Loans (Fundera)
- Financing Your California Business (NCSBC)
Videos
- California Small Business Finance (YouTube)
- SBA Loan Requirements (YouTube)
Business Loan Advisors