Your Complete Guide to Small Business Lenders
If you’re ready to seek financing for your business, keep in mind it can be a daunting task — there are so many lenders out there — and each offers an array of products. Although deciding what to do will definitely involve research and tough decision-making, it shouldn’t be too difficult to narrow the field of prospects down. Check out this overview of small business lenders — and the products they offer — to jump-start the process.
Finding a business lender
Which lender you work with to finance your business will depend on various factors, chief among them what type of funding you need. Different types of lenders specialize in different types of financing products, such as small business loans, lines of credit or merchant cash advances.
The first step in finding a lender is determining what type of financing is the best match for your needs. Answering that question will narrow down your options considerably. The next step is to research funders that offer the product you need — for example, only a few types of lenders might offer some products, such as term loans.
Once you’ve figured out the possibilities and looked into the details of what different lenders offer, you can begin vetting your options based on criteria specific to your situation and preferences. For example, you can eliminate any with eligibility requirements that exclude you, or that have other rules or processes you can’t deal with, such as a cumbersome application process or slow approvals. Remember, however, that some of those downsides are often paired with lower rates and fees.
Certain elements, like a minimum credit score for eligibility, might automatically put a lender out of the running for your needs. You might cross others off your list due to your preferences. The same things won’t be important to every borrower, so it’s important to think hard about your bottom-line needs.
Are you set on working with a lender in person? Is strong, phone-based customer service essential, or are you comfortable interacting with your lender mostly online? Do you want a lender who knows and understands your industry? Do you want a funder with roots in your local community or who prioritizes social responsibility?
Once you’ve trimmed your list down to the top prospects, you can compare details to decide which is your top pick. Peruse each one’s website and call customer service to see how transparent, forthcoming, supportive and patient employees are regarding your questions. Figure out each lender’s rates and fees — and make sure you ask about any and all hidden fees. Learn about each lender’s application requirements, how long it takes to receive funding and how the payment schedules work.
All that legwork should help you narrow your options down. Before you start, however, make sure you have an understanding of the types of available lenders and how they differ from each other.
Which small business lender is right for you?
Small business financing, long dominated by traditional banks, is facing a kind of revolution as the internet makes access to capital easier. An abundance of nontraditional online lenders is popping up to fill gaps in traditional financing models, especially where it comes to funding borrowers with poor credit and providing funds quickly with streamlined application processes.
Of course, the traditional lenders in this space are still going strong, and thy are still usually the best option for businesses with good credit and the patience for complex application procedures.
Here’s a rundown of the types of funders you might be considering:
Banks vary in size, from major international institutions to small community institutions that serve local areas. Their commonality is in their cautious approach to lending. Banks of any size typically require good credit, thorough vetting via a detailed application and substantial collateral. In return, borrowers get low rates and — usually — reasonable fees. Banks most often offer solid, traditional funding options, such as term loans and lines of credit. A few examples of bank lenders include Wells Fargo, Bank of America and Suntrust.
Credit unions operate like banks but differ but differ because they are nonprofit organizations that are owned and controlled by the members who bank with the institution. Members elect a volunteer board of directors, and any profits benefit members in the form of lowered fees and loan rates. For this reason, rates for borrowing from credit unions are usually among the lowest, and credit unions tend to be helpful and supportive of members’ business needs.
Some examples of credit unions include the State Department Federal Credit Union in Washington, D.C.; Boeing Employees Credit Union in Seattle; and Tropical Financial in Florida. It’s usually best to work with a locally based credit union — and one with a good reputation in the community.
SBA partner institutions.
The Small Business Administration does not give loans directly but backs a wide array of partners that disburse loans. The type of partner a borrower will work with to procure an SBA loan depends on the type of loan — banks and credit unions back SBA 7(a) loans and microloans, and nonprofit, Certified Development Companies, which each cover a certain geographic area, administer 504/CDC loans. Reach out to your local SBA office and ask about how to find an SBA lending partner that’s right for your situation.
There is a number of different types of online lenders — these institutions range from high-level funders who give millions in revenue-based financing to tech startups to shady dealers who peddle super-costly merchant cash advances to hard-up borrowers. The one thing they all have in common is that they are not banks, so they focus on filling needs that traditional lenders don’t. They typically offer everything from fast, few-questions-asked financing to hyper-targeted, industry-specific support to innovating new models, such as peer-to-peer funding. Some examples of online lenders include BlueVine, PayPal Working Capital, Funding Circle, Rapid Advance and OnDeck.
Business loan types
Small businesses are privy to wide variety of loans and other financial products, which you can place into three groups: loans, lines of credit and cash advances.
Loans. Private loans and government-backed SBA loans are traditional financing options for small businesses. Within that category is an assortment of different kinds of loans, including:
- Traditional term loans, which usually require repayment over several years
- Short-term loans, which require repayment within months
- Microloans for small amounts
- Specialty loans for a dedicated purpose, such as equipment financing
- Personal loans for business use
Banks and credit unions are the most popular providers of this type of financing, but online lenders have increasingly been funding loans, particularly short-term loans.
Lines of credit. Businesses that have ongoing and unpredictable needs for capital infusions might benefit from taking out a business line of credit, which operates like a credit card but typically comes with higher limits and lower rates and fees. As long as the borrower stays in good standing, the line of credit can last indefinitely, providing peace of mind to companies that experience frequent ups and downs. This product is a very flexible option — a business can use the cash for whatever it needs and can get the funding quickly once the line of credit is in place. It can be an extensive and time-consuming process to get approved for a line of credit, however — it’s best to do it far before you really need to use it. Banks and credit unions provide these products, but online lenders sometimes offer lines of credit as well.
Cash advances. Companies that need money right away or that don’t have access to traditional financing options might find cash advances are a good solution. These can also be useful in situations when cash inflow and outflow are temporarily misaligned, like during a lengthy billing cycle or a spate of late payments. These products involve a lender giving a borrower an upfront chunk of cash in exchange for an agreement to provide a portion of future earnings for repayment. There are two main types of cash advances for small business:
- Merchant cash advances — a lender agrees to take a percentage of future sales based on a business’s financial history,
- Invoice factoring — a borrower basically sells a portion of outstanding invoices to a lender
These products are commonly available from a host of newer, online lenders. Because these products tend to come with high rates and fees, it is important for borrowers to research potential lenders. Some companies offering cash advances might not be transparent — or they could even be deceptive.
The bottom line
Choosing the business lender that is right for you requires plenty of research and due diligence. A range of factors, including the type of funding you’re seeking, will influence your decision. You’ll know you’ve found a good match when you feel confident in the product and the lender — and have no qualms, regarding the process. Happy borrowing.