Who gives the best small business loans? A guide on small business lending
Small business owners request for loans to purchase inventory, buy an existing business, repair business equipment or expand the business. A recent research indicates that almost 70% of small businesses use different types of financing including venture capital, loans, credit cards and crowdfunding to meet both short-term and long term business needs.
The rest of the small business owners are unable to get adequate business financing. Most of these businesses close down when they are still very young. This clearly indicates that small business loans are important for maintaining a healthy business.
With the loans, you will be able to cover both short-term and long-term financial needs. Luckily, the number of alternative lenders is also increasing, and you can easily access a loan for your business. Some loans are used for specific business needs like purchase or new equipment or commercial mortgage while others are for general business funding.
Types of small business loans
Small Business Administration loans
Small Business Administration, SBA loans can be used for different purposes. A percentage of the loan is guaranteed by SBA, in case the business owner defaults, the government will pay a portion of the debt. But the loans are not directly offered by the government.SBA works with different partners like banks, micro lending institutions, and community development organizations who provide the loans to small business owners. There are different types of SBA loans available for small business owners depending on the business needs. The loans have varied terms, maximum amount and rates of interest. The only downside of SBA loans is that they require long paperwork processes and it may also take longer for the funds to be approved. Currently, there are 4 types of SBA loans available:SBA 7A loan program
This is a common type of SBA loan that can be used for a variety of business needs. Businesses can borrow up to $5M from a lender who is selected to participate in the program. Fixed asset loans have a term of up to 10 years while working capital loans have term lengths of up to 10 years.Microloan program
This SBA program provides loans to both startups and established businesses. The loans can be used for different needs like purchase of inventory, repair business equipment, debt refinancing among others. The funds are offered through intermediary lenders. Businesses can borrow microloans for amounts up to $50,000. The loan term varies depending on several factors which include the loan amount and how the funds will be used. Lenders provide the loan with a repayment term of up to six years.Real estate and equipment loans
This type of SBA financing falls under the CDC/504 loan program, which focuses on providing long term financing to businesses for purchase of major assets like commercial real estate and business equipment. SBA provides 40% of the maximum loan amount, 50% is provided by a participating lender and the remaining 10% is put up by the borrower as down payment. The funds are strictly used to purchase commercial real estate, long term machinery or refinancing a business expansion debt. Investors can borrow amounts up to $5.5M and the maturity period ranges from 10 to 20 years.Disaster loans
These are short-term loans provided to businesses for purchase or replacement of real estate, machinery and other equipment that may be destroyed or damaged in a declared disaster. The maximum loan amount is $2M and you can easily qualify for funding provided you show proof of the damage.
Conventional bank loans
One main benefit of traditional bank loans is that they have a lower rate of interest compared to other loan options. If your business is in good standing, you may also qualify for higher loan amounts. Besides, the loans have flexible repayment terms.
But just like SBA loans, there is much paperwork involved and it may take weeks to have the funds in your bank account. It also may not be easy to qualify for the loan. In fact, less than 30% of small business owners are approved for a traditional bank loan compared to over 60% who have to seek other forms of small business financing.
Alternative lending options are particularly useful for small business owners who have less than stellar credit. This is because lenders do not have tight requirements like those of SBA and conventional bank loans.
Most of these loans are provided online and involve less to no documentation. This reduces the approval time to less than 24 hours and you can receive funding within 3 business days.
Among the best alternative lenders include Kabbage, OnDeck Capital, BlueVine, Capital One and Credibility Capital. As stated earlier, you don’t need to have good credit to qualify for easy business loans online. Again, lenders do not have restrictions on how the funds should be used.
But since the loans are easier to qualify and have a fast approval rate, they tend to attract higher rates of interest compared to bank and SBA loans. You also have to read the fine print to ensure that you are working with a reputable lender to avoid any hidden charges.
The following types of loans are provided by conventional banks and alternative lenders
Working capital loans
These loans provide short term solutions for business owners who need funds to run the business operations. The loans are provided by both traditional financial institutions and alternative lenders.
One benefit of these loans is that they provide immediate financing to help minimize a cash flow gap. The loans have short repayment terms and they also come with higher interest rates compared to other forms of business financing.
Equipment loans are provided for purchase or repair of office equipment and machinery. The loans are repaid in monthly payments. Since the equipment to be purchased acts as collateral, these types of business loans are more accessible.
Business lines of credit
Just like business credit cards, lines of credit also offer a lot of flexibility. With this small business financing option, the borrower is approved for a revolving line of credit and charged interest only on the funds they draw and not the maximum limit. Lines of credit can be used for a variety of business needs. As long as you make payments on time, this can be a good option for small business owners to finance immediate business needs.
If you have cash flow problems caused by clients taking longer to pay, invoice financing, also referred to as invoice factoring can be a good solution for your business.
With this financing option, the business sells its unpaid customer invoices to a financing company and get funds in return. The business first receives an advance amount of between 70-80% of the total invoice value.
This rate can go up to 95% depending on the industry line you operate in. the remaining percentage is held in reserve, paid once the customer clears their invoice. This amount is usually less a factoring fee which is a percentage of the total invoice amount.
Merchant cash advance
If you need cash for immediate business needs merchant cash advance is among the best options to consider. With this option, the lender provides a lump sum of cash, which is paid with a percentage of your daily credit card transactions.
High-risk borrowers tend to be charged higher rates of interest compared to borrowers who bear low risks.
Before you apply for a small business loan
As a small business owner, there are many financing options available, but you also have to convince the lender that your business is profitable enough to afford loan repayments.
Besides, you should know the amount of loan to borrow and have a strong business plan. You stand a better chance of qualifying for a small business loan if you have good credit history. The following tips will help you find the best loan options to cover your business needs
Find a lender with flexible terms
With so many small business loan providers available, it is important to shop around and find a lender with flexible terms. Some lenders will want to see more of a good credit score, high annual revenue and a considerable number of years in business to have your loan approved.
Others provide funding to startups with no credit history and low annual revenue. All the same, it is much easier to find online lenders who are willing to work with you. But you also need to ensure that the lender offers flexible loan requirements.
Gather all the necessary documents
Traditional lending institutions require a wide range of documents when applying for a small business loan. These include;
Traditional lending institutions require a wide range of documents when applying for a small business loan. These include;
Balance sheet and income statement
Article or incorporation
Personal and business bank statements
Personal and business income tax returns
Commercial leases among others
These requirements make it almost impossible to qualify for traditional loans. If you need fast funding with less documentation, online lending can be a smart option for your business. This is because the loan can be applied online with less paperwork involved. The application process is also simpler and more straightforward compared to bank applications and once approved, you can receive the funds within a business day.
Some lenders may also require you to provide collateral, and especially if you are applying for large loan amounts. Collateral can be a business equipment, inventory or real estate that can be repossessed if you fail to repay the loan. There are also unsecured loan options which do not have collateral requirements, provided you show proof of repaying the loan on time.
Check your credit score
Most lenders will consider your personal credit score before funding your business. Borrowers with high credit scores can easily qualify for higher loan amounts with lower rates of interest. Before applying for a loan, carefully review your credit report to ensure that it is error free. Free credit reports are provided to consumers once a year by credit reporting agencies.
Draft a strong business plan
A business plan acts as the foundation of your business and the more solid and comprehensive it is the better for you. It is therefore important to come up with a well thought out plan before approaching a small business loan lender.
Best small business loans 2018
To find the best small business loan lender, here are some important things that you need to consider:
- Customer service ratings
- Loan terms
- Product availability
Going by the above criteria. Here are the 4 best small business loan lenders in the United States that you can consider working with:
Kabbage is among the best small business lenders due to their quick application process and fast approval rate. To qualify, you need to generate an annual revenue of at least $50,000, which is a lower revenue requirement compared to other business lenders. Startups can also obtain lines of credit between $2,000 and $250,000. Kabbage lines of credit have a loan term of 12 months. This is a good option for small business owners who want a shorter repayment period, need instant cash and have been in business for at least one year.
OnDeck is known for providing loans to small business owners with bad credit score. The lender offers lines of credit of up to $100,000 and term loans of up to $500,000. To qualify for a term loan, you should have a FICO score of at least 500. The loans have a term of up to 36 months. You should also be in business for at least one year, generate minimum annual revenue of $100,000 and provide personal guarantees as collateral.
Invoice factoring is among the short term financing options used by businesses when they need funds for working capital. With BlueVine, you can qualify for invoice factoring if you have been in business for only 3 months. The lender also offers lines of credit for businesses that have been in operation for 6+ months. You should have a minimum FICO score of 530 to qualify for invoice factoring while lines of credit require a score of 600. You can easily qualify for a line of credit if you have been in business for less than 1 year with an annual revenue of at least $100,000.
- Funding Circle
Funding Circle is known for providing business loans with low rates of interest. You need to have a FICO score of 620+ to qualify and there are no minimum revenue requirements. However, you should be in business for at least 2 years with an annual revenue of at least $250,000 to access the funds. For business owners who need loans with low APR, have fair credit and generate low revenue, Funding Circle business loans can be a good option.
What if you are denied a small business loan?
Failure to be approved for a small business loan does not mean that you are completely out of options. Here are some of the alternative lending options you can consider:
- Personal loans
If you qualify for a personal loan, you can use the fund for any need, which includes funding your business. What you should bear in mind before taking out the loan is that unsecured personal loans, which will require you to issue a personal asset as collateral can be risky. This is because the lender can repossess the asset if you default.
- Business credit cards
A business card can also be a good option if you do not qualify for a small business loan. They are also easy to qualify for. The only disadvantage is that they tend to attract a higher rate of interest compared to other financing options.
- Business grants
If your business engages in educational or scientific research, you can easily qualify for federal grants. Unlike loans, you don’t have to pay the money back and the funds can be used for any business need. There are also grants that come with additional benefits like mentorships and workshops to help get your business off the ground.
How to get a small business loan
There is no denying in the fact that alternative lenders charge higher rate of interest compared to banks. However, it is much easier to qualify for a business loan from alternative lender.
You also will want to work with a lender with affordable rates, flexible terms and transparent fees. Here are some of the things you should consider to ensure that you get the best loan product for your business.
- Loan amount
Alternative lenders do not offer large business loans like banks, but if your business is in good standing, you can find a lender who provides 6 figure loans to finance your business needs.
- Clear eligibility requirements
Compared to traditional financial institutions, alternative lenders have a streamlined application and approval process. It is actually frustrating to realize that you don’t qualify for a loan way after you have already started the application process.
- Competitive rates
With big banks, it is easier to qualify for a business loan with low interest rates. Alternative lenders also offer loans at affordable rates for borrowers with good credit and strong financial history. If you do not have an attractive credit, it may be difficult to get affordable loan.
Finding the best small business loans: conclusion
Even with the rise of online lending, qualifying for a small business loan can be tricky. Even if you have a strong business background, you may still not meet requirements for other lenders.
Finding the best lender is as important as the loan itself. The above tips will help you find the best lender who can help meet your business financial needs. If you have problems handling your business finances, you can also consider hiring a professional to help you get more organized.
The good thing is that no matter your situation, you can always find a lender who is willing to work with you. All you need to do is ensure that you have a strong business plan, research the best lender and start the application process. You should also provide the necessary documents and meet all the lender requirements to increase your chances of being approved.