by Susan Clayton
February 29, 2016

According to a study conducted by the Wells Fargo Small Business Index, the average small business owner puts up about $10,000 startup capital. Most businesses will eventually need to take on additional capital—having business debt helps small business owners mitigate cash flow issues and increase creditworthiness as the debt is repaid over time.

For health care companies, cash flow issues can cause major headaches. Many medical businesses rely on patient payments and Medicare/insurance reimbursements that are subject to delays due to new coding implementation. Health care professionals increasingly turn toward alternative forms of financing to pay their bills. But how does one go about acquiring financing for their small business? Below are some of the criteria lenders take into consideration.

  • Equity investment—Many lenders prefer to see that equity has been invested into the business before approving a loan. Outside equity is hard for many small businesses to acquire; only about 6 percent of young firms' financing comes from angel investment or venture capital. The balance typically comes from the owner directly.
  • Working capital—Lenders usually look into a company's liquid assets versus their short-term liabilities when evaluating a loan proposal. A company's ability to effectively manage their working capital is crucial to their success.
  • Collateral—For longer-term loans, particularly real estate or equipment loans, lenders will require fixed assets to be used as collateral to provide additional security against borrower defaults.

Lenders look at factors such as revenue, cash flow, net income and profitability in determining the amount of financing for which a small business qualifies. By having the documents listed below readily available before you begin the loan process, a small business can expedite the loan application and underwriting process for the lender.

  • Electronic copies of six months of bank statements
  • Recent financial statements, such as a balance sheet or an income statement. A snapshot from Quickbooks or other accounting software should suffice.
  • Color copy of driver's license
  • IRS Tax Identification Verification Letter to prove the company's existence and good standing
  • Electronic copies of existing debt agreements from other lenders, as well as agreements on any state or federal tax liens if applicable.
  • Electronic copies of tax returns for the business and the owner are also required by some lenders.

The Small Business Administration was formed by the government to improve access to capital for small businesses. They provide a variety of loan vehicles, including:

  • General Small Business Loans—The most common program offered by the SBA. These loans are available for for-profit businesses that have some equity invested in the company and have used other financing sources—such as personal funds—before coming to the SBA. These are known as 7(a) loans and are originated through larger financial institutions such as banks.
  • Microloan Program—This program, with a maximum facility size of $50,000, is designed to help small businesses during startup and expansion phases. The loan typically requires some form of collateral, as well as a personal guarantee from the owner.
  • Real Estate and Equipment Loans—Documented as CDC/504 loans, Real Estate and Equipment Loans provide financing for larger fixed assets. To qualify, a firm must have a net worth of less than $15 million and net income of less than $5 million. The resources of the business and the owner\'92s personal financials are extensively examined.

While SBA loans are appealing to many small business owners, the qualification criterion is much more stringent for these loans than it is for other financing options. Advantages of SBA loans include larger maximum facilities, longer repayment terms and lower interest rates. However, obtaining a SBA loan takes a much longer amount of time—this, coupled with stricter credit standards, leads to a higher amount of rejections. According to a 2015 study conducted by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia, only half of small businesses receive any amount of funding when applying for an SBA loan.

Alternatives to the SBA's funding programs are loans from banks or credit unions. These financial institutions can offer specialized loans to health care small businesses often through sales teams dedicated to the sector. Banks and credit unions have individual credit approval processes, but all will generally require significant documentation from the borrower similar to the requirements from the SBA. Bank loans can be large where collateral is available, and can also have attractive, low interest rates. Likewise, banks also have the potential to work with clients who might have been previously turned down for SBA loans, but still have fairly high credit standards. While a bank's underwriting process may not take two to three months like an SBA loan, it may still take two to eight weeks.

A third category—small business specialty finance loans—has the ability to help small businesses achieve financing. There are a number of specialty finance companies dedicated to the health care industry, and others have industry-focused sales groups. These specialty finance lenders typically provide loans with shorter maturity, typically less than one year. This means the repayment terms are much faster, and typically include higher interest rates. However, collateral is usually not required, and the time to acquire the funds is considerably shorter.

The big advantage of working with these types of lenders is speed and convenience. The list of items to apply for a specialty finance loan is typically limited to just bank statements and a simple application. Much of the process can be done on a computer or even a smartphone. Many of these specialty finance companies can also provide money to their clients within one or two business days. These alternative lenders are focused on creating a consumer experience that is crisp and convenient.

Whatever financing avenue your business decides to pursue, having all available information will allow you to make an informed decision that will ultimately be in the best interest of your business goals. If your business does not qualify for a low interest rate loan immediately, work to improve and build your credit with an alternative lender and you might qualify for a bank or SBA loan later.