Is Your Small to Medium-Sized Business Ready to Grow?
Before you start investing in new equipment, facilities, acquisitions, or market expansions, it’s important to understand your options for financing and managing the growth of your business. While finding the right small business loan is important, it's just one part of building a stronger foundation for your business's success.
Sometimes, business owners rely on an intuition or a “gut feeling” for choosing the right time to invest in growth. If a new opportunity has emerged, you’re receiving positive feedback and strong signals from your target market, or your current production facilities are nearing capacity, it might be time to seek financing for small to medium-sized business (SMB) growth.
“Often the SMB owner senses that an investment in personnel, machinery and equipment, or increased space will drive growth,” says Miguel Alandete, Head of SBA Lending at First Horizon Bank. “Choosing the right growth financing can empower your business to achieve continued growth and increased cash flow in a manner that would not have been possible without the investment.”
Let’s look at a big-picture overview of what business owners need to know about growing your SMB, and how you can make the right moves to improve your business’s financial performance to scale up your growth.
To Finance Your Small Business Growth, Start at the Bank
One of the best ways to seek growth financing for SMBs, especially if you’re running an established business with several years of operational history, is by consulting with a bank. Conventional bank business loans and SBA loans are often ideal starting points for funding growth plans, as they typically offer lower-cost financing and don't require giving up equity in your business.
“Start by calling your banker and consider all the lending options that might exist for you and your business,” advises Alandete.
Banks commonly offer two popular types of business loans: conventional small business loans and SBA loans. Depending on your business’s credit history, financial performance, and strategic growth goals, either option could be the ideal fit.
Conventional Bank Loans vs. SBA Loans
There are a few big differences between conventional bank loans and SBA loans:
- Conventional bank loans – These loans are often available in various forms, including term loans with fixed payments over a specific period, working capital loans, business lines of credit, and equipment financing loans.
- SBA loans – Backed by the federal government’s Small Business Administration (SBA), these loans can be advantageous for some SMB borrowers due to favorable terms. However, the specific SBA loan program you choose may impose certain restrictions on how the loan can be used.
Choosing SBA Loans or Conventional Bank Loans
Your business might qualify for conventional bank loans or SBA loans, and both types of loans can be the right fit for certain situations. But certain loans have additional costs or limitations, so choosing the right business loan for your situation should be part of a larger conversation with your business banker.
Don’t assume that your business can only qualify for one type of small business loan, even if your business is still in startup mode, or even if you have less-than-perfect credit. Go into the conversation with your banker with an open mind and see what might be possible. Small business lending experts can evaluate your business’s overall credit history, financial strength, and business goals, and recommend the best small business loan to support your SMB growth plans.
“Typically, any growing business should consider both conventional and SBA loan options,” says Alandete. “A good banker will provide clarity on the costs – both implicit and explicit for all the options. The benefits of SBA lending are specifically designed to help growing companies by lessening the impact of the financing on a company’s operating capital. This happens by requiring lower borrower injection into a project and stretching out the terms, so repayment is easier than conventional lending.”
Newer businesses often qualify for SBA loans, while well-established businesses may be eligible for conventional bank loans but find that SBA loans offer unique benefits, making them a better fit. Banks typically have some flexibility in connecting small business owners with the most suitable loan option to support SMB growth.
“Every bank will approach SBA lending differently – some will be open to lending to startups, and other banks won’t," Alandete explains. "In some cases, additional collateral might be required, but in other cases it will not. Business acquisitions are uniquely suited to SBA financing because of the intangible asset related to goodwill, which makes these loans difficult to collateralize conventionally. SBA can provide a solution in cases like this.”
How to Qualify for Small Business Loans
Whether your business needs a conventional loan or SBA loan, there are steps you can take to strengthen your SMB's loan application. Alandete recommends compiling this checklist of must-have items before applying:
- 3 years of business tax returns
- Recent quarterly interim P&L and balance sheet
- Business debt schedule
- 3 years of personal tax returns for any individual principals who own 20% or more of the business
- Personal financial statements for the individuals providing personal tax returns
- Executive summary explaining the history of the business, the plan for the future and how the business loan will enable growth
“Sometimes financial projections and business plans will also be valuable as part of a business loan application,” Alandete adds. “Most banks want to see that the business has the ability to satisfy their existing and proposed debt from historical cash flow.”
What If Your Business Doesn't Qualify for a Bank Loan?
Not every SMB will qualify for a conventional bank loan or SBA loan from every bank. But if a loan conversation with your banker doesn’t end with the result you wanted, don’t give up – you still have other options to get growth funding for your SMB.
“Banks sometimes cannot help, but a good banker can likely point a borrower in the right direction to find a financing solution when appropriate,” explains Alandete. “For example, if a bank does not typically finance startups, a banker who’s knowledgeable of their community’s resources might be able to refer a business to a Small Business Development Center or a Community Development Financial Institution for a temporary solution until the company becomes bankable.”
Cash Management for a Growing SMB
Securing financing for SMB growth is only one part of the journey. Beyond improving your business facilities or investing in new equipment and productive capacity, your SMB should also maintain a strong focus on its balance sheet. Strengthening core financial fundamentals, such as cash management, plays an important role in supporting sustainable growth.
Here are a few tips to improve your cash management as your company grows:
Set Up Smarter Systems for Cash Management. Especially for fast-growing SMBs, as business revenue increases, opportunities often arise to streamline your processes and enhance cash management systems. This might include systems and tools like Remote Deposit Capture, allowing checks to be deposited via scanner rather than requiring trips to the bank.
Automate Your Cash Management. As a small to midsized business grows, eliminating slow, friction-filled manual processes becomes essential. Automating and digitizing wherever possible can significantly streamline operations. Here are some ways to make your SMB’s cash management less manual and more automated:
- Use online bill pay and mobile payment apps
- Integrate your business bank accounts with QuickBooks or other online bookkeeping tools
- Set up ACH payments instead of writing paper checks
- Use a purchasing card program to manage your business spend
Get Paid Faster
As SMBs grow, improving cash flow by speeding up receivables becomes key. Updating cash management processes might include adopting digital tools to send invoices automatically with shorter payment terms. The faster you invoice, the sooner you can receive payment.
You could also capitalize on your new stage of SMB growth by upgrading your card payments capabilities to enable on-the-spot payments. Accepting mobile credit card payments is particularly beneficial for SMBs with service reps or technicians who work at customers’ homes or B2B client job sites.
Budgeting and Planning
As your business grows, it's even more important to think ahead with clear goals, budgets, and accurate financial projections. Here are a few tips to visualize your business's financial performance and manage your business finances to stay ahead of the game.
Use Digital Budgeting Tools. First Horizon offers a suite of digital banking tools designed for small businesses, helping you track spending, set budgets, create savings goals, and more. By closely examining your SMB’s transaction history, income, and spending trends, you can stay on track for stronger financial performance.
Talk with a Local SBDC Consultant. If your SMB has been declined for a business loan, consulting an expert can provide helpful advice and technical assistance to strengthen your position for securing growth financing. The Small Business Administration has a network of partner organizations called Small Business Development Centers (SBDCs), which can help you better understand and improve your business's financial performance.
“The SBA subsidizes consultants in many communities that can be located by searching for a local Small Business Development Center,” explains Alandete. “These SBDC consultants have many tools available to help SMB owners create good projections based on reasonable assumptions. Often these SBDCs know the business-lending community well and can help SMBs narrow their financing options.”
If your small business is ready to expand, finding the right small business loans to finance your growth is essential. Alongside scaling your business and increasing revenue, improving cash flow through effective cash management and gaining a better view of your financial performance are important steps. With a smart strategy, careful planning, and support from an SMB lender aligned with your goals, you can unlock a profitable new phase of growth for your business.
Looking for additional guidance? Connect with a First Horizon banker to learn more.
