One of the main reasons applying for a small business loan is seen as such a confusing, stressful process is the fact that every business lender is different. It’s not uncommon for a borrower to have to speak with multiple business lenders before being approved. After figuring out which type of small business loan makes sense for your specific needs (which is tedious enough), you have to find a business lender that offers your desired program for requirements you are able to meet.
And if you plan on taking out more small business loans in the future, the program you want is far from the only factor you should look for in a business lender. We’ll discuss those factors later on. For now, let’s start by laying out the most popular business funding programs, since you can’t move forward without knowing which one is right for you.
- 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 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.
The next step is to determine which business lenders offer the program(s) you have in mind. Here are the most popular sources of small business loans along with the programs they offer, the borrowing limits for each program, and the time it takes for the average borrower to receive funding (AFT) :
Commercial Bank: 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 to $15,000) AFT (Up to 90 days).
Peer to Peer Lender: Technically, peer-to-peer lenders like Funding Circle, Lending Club, and Street Shares aren’t business lenders themselves. The money doesn’t come directly come from them. Instead, they act as a middleman between the borrower and individual investor or an institutional investor, like a hedge fund or investment bank. Between these three options, you can get a Term Loan ($2,000 to $500,000), Business Line of Credit ($5,000 to $150,000), and Invoice/Accounts Receivable Factoring (90% of invoice), all of which will reach your bank account in anywhere from 1-14 days.
Online Lenders: The most widely-praised online business lenders include Kabbage, OnDeck, Currency Capital, and BlueVine. Between these four options, you can get a Term Loan ($5,000 to $2M), Business Line of Credit ($2,000 to $250,000), and Invoice/Accounts Receivable Factoring (Up to $250,000), all of which carry an AFT of 24-48 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).
Before getting your heart set on a certain program from a certain lender, keep in mind that every lender has their own requirements. Here are the general requirements for the options listed above:
Commercial Bank: 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, meaning 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. If you don’t think you can satisfy this requirement, you may still be able to get approved by providing collateral. Equipment, inventory, accounts receivable, or even all the business’ assets can be required for 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.
Peer to Peer Lender: At least one year in business, minimum personal credit score of 600, and annual revenue of at least $50,000. Other requirements, like personal guarantees and recent bankruptcies, are based on which lender you choose.
Online Lenders: At least six months in business, 585+ credit score and $75,000+ in annual revenue for a Term Loan. For a business line of credit, a minimum credit score is not required but you must be in business for at least a year and earn at least $50,000 in annual revenue. Invoice/Accounts Receivable Factoring requires a credit score of 530+, at least 3 months in business, and $100,000+ in annual revenue.
United Capital Source: At least six months in business and $100,000 in annual revenue. 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.
Here are the interest rates and terms for these five types of business lenders:
Commercial Bank: 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%.
Peer to Peer Lender: 7.4% – 40%, 6 months to 5 years for most products.
Online Lenders: Term Loan (Interest of 6% to 99%, 3 months – 5 years), Business Line of Credit (Interest of 15% to 99%, six months – twelve months), Invoice/Accounts Receivable Factoring (Interest of 15% to 68%, 1 week – 13 weeks).
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)
Now that you know the basic information about each business lender’s requirements and products, it’s time to ask yourself “What exactly do I want out of a business lender?” Certain characteristics about each business lender could make it much easier or harder for you to access and repay the loan you have in mind. Here are a few of those characteristics:
- Experience With Your Industry
You are much more likely to find terms that make sense for your cash flow situation if you work with a business lender with experience in your industry. Banks, for example, are traditionally biased against industries that are stereotyped as “risky” or “low growth.” They tend to favor “recession-proof” industries with high profit margins. If you work in an industry that is currently doing very well, you probably won’t have to look too far for a willing business lender. But other business lenders may have no problem working with industries that are known for cash flow issues, like retail stores or hotels. When shopping for business lenders, it’s wise to begin by asking about the potential lender’s experience with businesses of your industry and size.
- Customer Service
For many borrowers, the decision of which business lender to work with came down to how comfortable and important each potential lender made them feel. These borrowers likely harbored several concerns about the repayment process, such as what would happen in the event of a financial emergency. They also likely wanted to speak with human beings, rather than leaving a game-changing investment in the hands of a computer algorithm. If you’d prefer a business lender who can offer crucial financial advice and negotiable terms, you might not want to simply choose the least expensive or least tedious option available.
The success of online business lenders has proven just how valuable convenience is to today’s borrowers. Online business lenders are usually not the cheapest option but their accessibility and speed are virtually unrivaled. Borrowers can often be approved and funded in under 24 hours. Over the past few years, however, other business lenders have developed the capabilities to nearly duplicate both of the two aforementioned strengths. Their applications can be completed very quickly as well. But if you are looking for the lowest interest rates and highest borrowing amounts on the market, you’re probably going to have to compile a lot of paperwork and wait at least a couple of months to get funded.
- Potential For Long-Term Partnerships
Odds are, this isn’t going to be the only time you’ll need additional business funding. Some industries are naturally prone to occasional dips in cash flow, while others must continuously expand in order to survive. If this sounds like you, it would be a good idea to choose a business lender that is known for approving multiple rounds of funding and prioritizing long-term partnerships. These business lenders tend to offer terms that are not geared towards drawing the largest or quickest profits. This allows them to approve applicants with poor credit or less than perfect cash flow. As long as they can repay the first business loan without trouble, the borrower will likely have no problem obtaining a second, third, fourth, etc.