When business lenders talk about the “transformation” or “evolution” of their industry, they are mostly referring to the rise of online business lenders. It sometimes seems like a new online business lender pops up every day. They typically offer the same programs as traditional business lenders (banks, credit unions) but with one or two major differences in relation to terms or accessibility. This makes each program from each business lender uniquely convenient and advantageous. Having so many options to choose from, however, also makes the process of finding the right small business loan significantly more intimidating.
In this guide, we’ll compare the programs of several traditional and online business lenders so you can see exactly which factors differentiate each option.
Step 1: Business Funding Programs
Here are the most popular business funding programs available today:
- Standard Business Term Loan: You receive a set amount upfront that is then paid back (with fees) over a set period of time. Fixed payments are made each month.
- SBA Loan: Same structure as a term loan. The only differences are the requirements and terms, which will be explained later on.
- Business Line of Credit: You are given a revolving credit limit that you can borrow from at any time. Payments are only made when you borrow.
- Merchant Cash Advance (Credit Card Factoring): You receive a lump sum that is paid back via a fixed percentage of daily debit and credit card sales.
- Invoice/Accounts Receivable Factoring: The business lender purchases your outstanding invoice/receivable for a discount price and pays you right away.
- Equipment Financing: Like a traditional business loan, you receive financing to pay for a particular piece of equipment, then fixed payments are made each month.
- Revenue Based Business Loan (Business Cash Advance): Similar to a MCA but your payments are deducted via a fixed percentage of your entire monthly revenue.
Step 2: Business Lenders
Here are the most popular traditional and non-traditional business lenders along with their programs, borrowing limits, and the amount of time it takes them to approve and distribute funding (AFT):
- Commercial Banks: Term Loan ($10,000 to $5M), SBA Loan ($5,000 to $10M), Business Line Of Credit ($5,000 to $100,000) AFT (48 hours to 90 days)
- Credit Union: Term Loan (Up to $250,000) Business Line Of Credit (Up $15,000) AFT (Up to 90 days).
- Currency Capital: Equipment Financing ($5,000 to $2 million), AFT (A few hours to 2 weeks)
- Kabbage: Business Line of Credit (Up to $150,000) AFT (24-48 hours)
- BlueVine: Business Line of Credit (Up to $250,000), Accounts Receivable Factoring ($20,000 to $5 million) AFT (12-24 hours)
- OnDeck: Term Loan ($5,000 to $500,000), Business Line of Credit (Up to $100,000) AFT (Under 24 hours)
- United Capital Source: Term Loan ($10k to $5m), SBA Loan ($50k to $10m), Business Line Of Credit ($1k to $250k), Merchant Cash Advance ($7,500 to $1m), Invoice/Accounts Receivable Factoring ($10k to $10m), Equipment Financing ($10k to $5m), Revenue Based Business Loan ($10k to $5m), AFT (24-48 hours)
Step 3: Interest Rates
Here are the interest rates for the programs listed above:
- Commercial Banks: 4% to 10% on most bank loan products, 1-5 years for term loan, 5-25 years for SBA Loan.
- Credit Union: Every credit union has their own interest rates and terms, but the interest rates are usually lower than commercial banks. A 2015 report found that the average 36-month Term Loan from a credit union had an interest rate of 9.39%.
- Currency Capital: Currency Capital’s annual percentage rates, or APRs, range from 6% to 24%, though average and median APRs are reportedly 8% and 15%.
- Kabbage: Business lines of credit from Kabbage carry APRs between 24% and 99%. Monthly payments are a percentage of the amount borrowed plus another fee of between 1% and 10% of the amount borrowed. With the six-month plan, your fee is 10% for the first two months and 1% for the final four. The 12-month plan has higher fees in the first six months but drops to 1% for the final six.
- BlueVine: 15% to 78% (LOC) 15% to 68% (Accounts Receivable Factoring)
- OnDeck: 16.7% to 99.4% as of Q1 2018 (term loan) 11% to 60.8% as of Q1 2018 (business line of credit)
- United Capital Source: MCA (Factor rates starting at 1.09%, 3 – 18 Months), SBA Loan (Interest of 5% and up, 3 – 25 years), Business Line Of Credit (Interest of 8% and up, up to 18 months), Term Loan (Rates starting at 9%, 3 – 10 years), Invoice/Accounts Receivables Factoring (Interest rates starting at 5.8%, Up to 24 Months), Revenue Based Business Loan (Rates starting at 9%, 3 – 10 years), Working Capital Loan (Rates starting at 9%, 3 months-10 years)
Step 4: Requirements
Here are the requirements for the programs listed above:
- Commercial Banks: Credit score must be above 700. Business must at least six months old, but preferably over two years old. Annual business revenues of at least $100,000. Several banks offer unsecured business term loans and business lines of credit, which means you do not need collateral. But in order to qualify, you must fulfill the other requirements with flying colors. What makes all bank loans so much harder to qualify for (compared to other options) is the near-universal requirement of significant working capital. Banks favor applicants who have enough money to finance their desired investment on their own, a.k.a applicants who don’t really “need” a loan. Collateral, however, can sometimes make up for having less working capital than the bank would like. Equipment, inventory, accounts receivable, or even all the business’ assets can be used as collateral.
- Credit Union: In order to borrow from a credit union, you must live, work, worship, or attend school in a specified area, or be a member of a group such as a school, labor union, or homeowners’ association. There are, however, numerous credit unions that anyone can join, usually by making a donation to a certain charity or joining an organization that is affiliated with the credit union. As for general requirements, they aren’t much different than those of a traditional bank, though many do not require collateral. Applicants for small to mid-sized loans may also be able to fall slightly short on some requirements, mainly because credit unions are non-profit.
- Currency Capital: 585+ personal credit score, 6+ months in business, $75,000+ annual revenue.
- Kabbage: 560+ personal credit score, 1+ years in business, $50,000+ annual revenue.
- BlueVine: 6-month line of credit: 600+ personal credit score, 6+ months in business, $120,000+ annual revenue, 12-month line of credit: 620+ personal credit score, 2+ years in business, $450,000+ annual revenue, Accounts Receivable Factoring: 530+ personal credit score, 3+ months in business, $100,000+ annual revenue.
- OnDeck: 500+ personal credit score, 1+ years in business, $100,000+ annual revenue (term loan), 600+ personal credit score, 1+ years in business, $100,000+ annual revenue (LOC).
- United Capital Source: At least six months in business and $100,000 in annual revenue is suggested, but we may be able to take lower revenues if other business factors are palatable. Borrowers with low credit scores (around 500) can be approved for short term business loans, merchant cash advances, business lines of credit, accounts receivable factoring, and revenue based business loans. UCS’s SBA “Marketplace” Loan is available for borrowers with credit scores as low as 650, but you must be in business for at least 2 years, earn at least $1.2 million in annual revenue, and have no bankruptcies or foreclosures in the past three years.
Step 5: Notable Observations
As you can see, funding from online business lenders is much easier to obtain for the average small business. In addition to looser requirements, hardly any paperwork is involved and the entire application process can usually be completed in a matter of minutes.
- Interest Rates
The easier it is to be approved, the more expensive the loan will (most likely) be. Many borrowers of online business lenders, however, likely chose this option because their cash flow/credit was less than perfect and they needed money right away.
- Borrowing Amounts
United Capital Source is one of the only non-traditional business lenders that can offer similar borrowing amounts to banks. Since most borrowers of online business lenders likely do not have the best credit scores or annual revenue, they probably weren’t applying for amounts anywhere near the lender’s borrowing limit.
- Subtle Differences Between Online Options
At first, the online options appear to be virtually identical. But when you take a closer look, you’ll notice a number of big differences. For example, OnDeck is the only one that offers the standard business term loan. BlueVine is the only one that can offer a business line of credit to a 6-month old business, but only Kabbage requires an annual revenue of just $50,000.
Step 6: Still Not Sure Which One To Pick?
If the aforementioned numbers haven’t swayed to a particular direction, the deciding factor may very well be customer service. A great deal of borrowers chose their business lenders based on how comfortable they felt with the application process or how personal their reps were on the phone.
Potential For Future Loans
You’d think that as long as you pay off your first business loan on time and your cash flow has not staggered, the business lender would see no issue with approving a second round of funding. But this doesn’t always happen. A Google search of reviews for certain online business lenders will reveal myriad first time borrowers that paid off their first loan without trouble but were declined when they applied again. Possible reasons include computer glitches, tumultuous cash flow, or misinformed customer service reps.
Before deciding on a business lender, it’s never a bad idea to ask questions. One question you absolutely want to ask is whether or not this business lender has extensive experience with your industry. If the answer is no, you might want to choose another option, even if it’s a little more expensive. Business lenders that have worked with a lot of companies like yours are less likely to be repelled by uncontrollable, industry-wide cash flow discrepancies.
It Doesn’t Have To Be Complicated
For many potential borrowers, choosing whether to go with a traditional or non-traditional business lender comes down to three factors: How much money they want, if they are content with the programs of traditional business lenders, and the likelihood of being approved.
Potential borrowers who want a lot of money, are content with traditional programs and believe they will be approved might as well go for it.
If (like the average small business owner) this doesn’t sound like you, then it’s time to seek other options. At that point, all you have to do is find out which business lenders offer the program you desire for the most competitive rates and will most likely approve your application. Don’t worry if you don’t get approved by your first choice. This doesn’t mean you won’t be approved by any other reputable business lender, most notably, United Capital Source.