Business Loans and Financing Options for California Companies
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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. Fortunately, California business owners have many loan and financing options to consider.
Bank Loans
Banks provide some of the most common types of financing for small businesses. Bank loan options include:
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 7(a) and 504 loans.
Business Lines of Credit
Lines of credit provide flexible access to capital up to a set limit. Businesses can draw down funds as needed and only pay interest on the amount used. Lines of credit allow businesses to manage cash flow fluctuations.
Term Loans
Term loans provide lump sums of cash up front and are paid back over a set repayment schedule with interest. Term loans work for major business expenses like equipment purchases, business expansions, and commercial real estate purchases.
Equipment Financing
Loans specifically for purchasing equipment like machinery, vehicles, and IT systems. Equipment loans usually have lower qualification requirements compared to other bank loans.
Commercial Mortgages
Mortgages help California businesses purchase commercial real estate like office buildings, retail space, warehouses, and land.
Alternative Lenders
Alternative online lenders provide financing options for businesses that may not qualify for bank loans. Common alternative loans include:
Merchant Cash Advances
A lump sum of capital is provided in exchange for a percentage of future credit card and debit card sales. Daily repayments come out of a portion of daily sales until the full amount is repaid plus a fee.
Invoice Factoring
Companies sell outstanding invoices to a commercial finance company for immediate capital. The finance company collects payment directly from the customers at a later date.
Startup Business Loans
Online lenders like Fundera provide loans specifically tailored for startups and younger companies. Startup loans can help bridge the gap until a business qualifies for conventional financing.
Short Term Loans
Online alternative lenders provide loans with shorter 1-3 year repayment terms. Short term loans work for smaller financing needs under $500,000.
Line of Credit
Many online lenders now offer lines of credit in addition to term loans. Lines of credit from alternative lenders provide flexible financing up to set limits.
Equipment FinancingAlternatives to bank equipment loans help businesses finance necessary equipment. Options include leasing, equipment loans, and equipment refinancing of existing equipment.
Equity Financing
Equity financing involves selling partial company ownership in exchange for capital. Equity financing options include:
Venture Capital
Venture capital firms provide substantial capital investment in exchange for equity stakes in startups and small businesses with strong growth potential. Venture capital works for funding high-risk, high-reward expansion.
Angel Investors
Wealthy individuals provide capital for small businesses with growth potential in exchange for ownership stakes. Angel investors also often provide mentorship in addition to financing.
Crowdfunding
Equity crowdfunding platforms allow California businesses to raise funds by selling shares online to a large pool of investors. Equity crowdfunding works for generating capital from a distributed group of stakeholders.
Revenue-based Financing
Investors provide growth capital in exchange for a percentage of monthly or quarterly gross revenue until the investment is paid pack plus a multiple. This type of financing works for capital-intensive companies.
Government Small Business Loans
Federal, state, and local government agencies offer financing programs, grants, and loans for California small businesses. Options include:
SBA 7(a), 504 and Microloans
The SBA offers small business loans like the 7(a) and 504 loans through local lending partners in addition to the microloans funded directly.
State Tax Credits and Grants
California offers state tax credits, grants, and incentives for small businesses by location, industry, or to promote growth in targeted socioeconomic areas.
CDFI Fund
The Community Development Financial Institutions (CDFI) Fund provides funding to mission-driven lenders who then provide loans to small businesses in low-income communities.
USDA Business Loans
The U.S. Department of Agriculture Rural Development program offers business loans and grants to support business growth in rural areas.
Export Financing
State and federal export assistance programs help California businesses get financing needed to sell products or services internationally.
Disaster Loans
Low-interest Economic Injury Disaster Loans provide working capital funds for businesses impacted by declared disasters and emergencies.
Self-funding
Rather than seeking outside financing, some California small business owners rely on internal funding sources like:
Personal Funds
Some entrepreneurs self-fund startups through personal savings, home equity lines, credit cards, retirement accounts, or funds from friends and family.
Business Revenue
Profitable businesses can fund growth initiatives and expansions through reinvesting excess revenue back into operations.
Bootstrapping
Bootstrapping represents ultra-lean startup practices like bartering for services, buying used equipment, and avoiding unnecessary expenses. The goal is to fund growth only through essential revenue and cash flows.
Choosing the Right Financing
With the many California small business lending options available, it helps to align financing choices with the business’ objectives and qualifications. Below are some best practices business owners can follow:
- Seek expert guidance from a small business banker, accountant, or lawyer
- Understand qualification criteria and repayment requirements for financing options
- Compare interest rates and fees from multiple lending sources
- Match the loan term length with the purpose of financing
- Choose financing that works with existing capital structure and ownership
- Fund growth initiatives that align with core business revenue streams
- Time financing decisions around business operating cycles and seasonal trends
Access to capital provides the fuel for small business growth in California. While the lending landscape continues to evolve with new products and providers, the same prudent practices apply when putting financing to work. Do the homework to find the right funding for the situation and remain focused on profitability to ensure success.
Resources
- SBA Loans Explained for Small Businesses – Reddit thread discussing SBA loan options.
- How to Get a Business Loan in California – Review of the top small business lenders in California.
- Small Business Financing Options – Avvo article covering different financing sources for entrepreneurs.
- California Government Grants – Resources on grants offered directly through the State of California.