Financing For California Businesses
With California having the largest population, and a majority of California residents being fairly wealthy, with a higher than average income per capita, it comes as no surprise that California has a larger and stronger business economy than some countries. According to the Assembly Committee on Jobs, Economic Development, and the Economy, in 2011, California’s gross domestic product would have ranked 9th among the top ten economies in the world if the state was its own country! This has greatly contributed to the year after year rapid growth of businesses in California.
California has nine major economic regions: Northern California, Northern Sacramento Valley, Greater Sacramento, Bay Area, Central Coast, San Joaquin Valley, Central Sierra, Southern California, and Southern Border. In addition to nine economic regions, add in well over 38 million people to the equation, and it is easy to understand how California businesses have fared so well, even though the United States economy is still rebounding from the 2008 Great Recession. Like the rest of the country, California businesses took major hits during the recession period, but now, California businesses are seeing rapid growth with an increase in the number of businesses opening up each year. Surprisingly, California’s economy recovered much faster than other states, leading to increased profitability for many Californian businesses.
Small Business Profile of California
Small businesses are vital components to the United States economy, as well as to California. According to the United States Small Business Administration, in 2015, there were over 3.7 million small business in California, which equates to 99.2 percent of all California businesses. These essential Californian small businesses employ over 6.7 million people, which is about 49.6 percent of all Californian workers; considering there are around 19,155 civilian labor force participants, according to the United States Bureau of Labor Statistics, small businesses employ a huge portion of workers in California.
These vital small businesses in California created over 244 thousand net new jobs in 2015, had a 32.7 percent increase in minority ownership, and supplied 95.8 percent of California exports that year. Based on race, the breakdown of Californian owned small businesses for 2015 was:
- African American owned – 28.6 percent
- Asian owned – 18.8 percent
- Hawaiian and Pacific Islander owned – 57.5 percent
- Hispanic owned – 43.9 percent
- Native American and/or Alaskan owned – -9.5 percent
- Minority owned – 32.7 percent
- Nonminority owned – -8.8 percent
By the third quarter of 2015, California’s overall economy grew at an annual rate of 2.1 percent, which is much faster than the overall United States growth rate, and lowered their unemployment rate from 6.9 percent in 2014 to 5.9 percent in 2015. Unfortunately, California’s unemployment rate is still higher than the national unemployment rate of 5 percent.
Challenges for Californian Businesses
Overall, businesses everywhere are doing well in California, but there are still many state specific challenges that are creating difficult hurdles for many business in California today. Some of the most important issues being faced by California business owners include:
- Lack of Skilled Workers: Unfortunately, more and more people in the United States are choosing not to obtain higher education, as well as a decline in high school graduates. California is experiencing a high volume of younger people who simply do not have the necessary skills and qualifications to work many vital jobs. This has led to an increased struggle by most California business owners who cannot find skilled, qualified workers to employ. While choosing not to pursue higher education is not bad, California has lacked resources for improved high school education and extracurricular funding. This has led to many trade job training and classes being cut from many high schools, widening the growing gap of uneducated, unskilled, and underqualified workers in one of the largest innovative technology states in the United States, leaving many business owners at a loss for what to do next. One major way local California small business owners are working to combat this issue is by working with local representatives to help raise funding for schools in the area to promote skilled training classes.
- Minimum Wage Hikes: Most of the United States is well aware of California’s high minimum wage laws that are in the process of rising soon. Many small business owners in California have expressed concern regarding these new minimum wage hikes. California small business owners are concerned that they will not be able to afford to pay the required minimum wage in the future, which would ultimately lead to hiring freezes, worker layoffs, and increase inefficient business practices due to the lack of employees that these businesses can afford to pay.
- High and Complex Business Taxes: As many Californian business owners are aware of, California business taxes are incredibly high, confusing, and downright frustrating at times. In essence, California tax laws are working towards preventing abuse of the tax system while catching high-income taxpayers, but unfortunately, many small California businesses get tangled in the complex web of California tax regulations. California is also unique in that the state does not offer nearly as many tax exemptions and tax credits as other states, making it difficult to avoid some of the heavy burden taxes associated with running a small business in California. However, many small business owners in California do realize that in the end, these tax laws are put in place to prevent inequalities in the tax system. Many California business owners suggest consulting with a local tax professional to fully understand all relevant tax laws.
California Business Financing Needs
Every business experiences fluctuations in profits, as well as emergency situations that call for payment up front. With the help of California business financing options, many California business owners can manage their day to day working capital costs with ease. Some of the most common uses for California business loans include:
- Purchasing a business
- Purchasing business real estate
- Refinance a business loan
- Consolidate business debt
- Working capital
- Equipment acquisition
- Inventory Loan
California SBA loans
SBA lending is an excellent way for California businesses with good credit and solid business revenue to get a bank-rate business loan if they’ve been unsuccessful in obtaining conventional small business financing. SBA loans aren’t loans provided by the Small Business Administration or government. Instead, SBA loans are provided by conventional lenders, but the government agrees to back a portion of the loan, which will cover a major part of the California SBA lender’s losses. While SBA requirements are strict, the are great for refinancing business loans into a lower rate, consolidating high-interest business debt, general working capital uses, purchasing, or refinancing commercial real estate, and obtain new equipment.
California Bank Loans
Conventional bank business loans offer great rates and fantastic terms for California businesses that qualify for traditional financing. Bank loans generally have rates that can start at 5% and can go to the low teens depending upon the situation and the creditworthiness of the small business seeking funding. Traditional lenders do scrutinize the applicant’s information and only lend to the highest quality applicants. Uses for California conventional small business loans including purchasing real estate, refinancing real estate, refinancing and consolidation of small business debt, working capital, lines of credit and equipment loans.
Alternative California Loans
Alternative loans for California businesses are a fantastic option for small businesses that have been unable to get approved for conventional loans. While alternative lending doesn’t provide rates as low as banks, or terms as long as SBA lenders, they do offer true APR rates with terms that can range up to 5 years. Most of all, alternative lending can be completed in less than a week in most cases, with approvals almost instantaneously. Uses for California alternative lending is almost always for operating capital uses, like expansion, payroll, bills, advertising, and emergency funding uses.
California Asset Based Financing
Asset based lending for California businesses is a way for the company to use the assets on their balance sheets as collateral for financing. There are several assets that a California small business may use to monetize for funding, including commercial or the owner’s personal real estate, accounts receivable, equipment & machinery and sometimes inventory.
California Invoice Factoring
Invoice factoring (also referred to as invoice financing) is a way for a California company to use their unpaid 30-90 unpaid invoices are collateral to obtain financing. Depending on the type of invoice financing, a lender will usually forward the small business that’s borrowing funds a large portion of the unpaid invoice’s value, and will charge the company a fee. Once the invoice is fully-paid, the lender will then forward the remaining balance to the company.
California Equipment Financing
Equipment leasing is a way for California businesses to obtain needed small business equipment and machinery without having the pay the full-price of the equipment upfront. By leasing your company’s equipment, you also aren’t at risk of being stuck with outdated machinery after a couple of years. Equipment leasing companies will purchase the machinery for the small business, and then lease it to the small business for a period of years. At the end of the term (usually between 3-10 years) the small business is usually offered the chance to buy the equipment for as low as a dollar, refinance the term, or return the equipment to the lender.
California Private Lending
Private loans for California businesses are a way to get non-bank business financing with maximum flexibility. Private lenders generally like to focus on the company’s net profitability, so to get financed the California small business seeking private lending will need to show 2-3 years of solid net revenues. Private business loans are a great way for California businesses with lots of cash advance debt to refinance and consolidate the advances into monthly payments.
California Business Cash Advance
Merchant and business cash advances are a way for California businesses in need of working capital to use the potential of the company’s future revenue to get an advance on those funds immediately. A California Merchant Cash Advance isn’t a loan at all, but the sale of the California small business’s future receivables to a cash advance lender in return for upfront cash. Cash advances can be calculated using the California company’s cash flow through their business bank accounts, or through looking at the revenue that they generate through credit card sales. Repayment for a merchant cash advance is either paid by having a set daily payment remitted to the cash advance funder through daily payments via ACH, or it can be repaid by having a portion of the company’s credit card sales remitted to the merchant cash advance lender. Since a cash advance is secured by future revenue and not credit, cash advance lenders are able to offer MCAs to those with bad credit.