Between Uber drivers expanding across the country, mobile app startups cropping up by the dozens in Silicon Valley, and local entrepreneurs snatching up brick and mortar space in their cities and towns, it’s clear that today’s economy is finally — at least for now — on the rise. Unemployment rates are back down after the 2008 economic crash, emerging technologies continue to widen the field for competitive advantage, and the tide has turned on credit.
The new year looks to be a great time to start — or expand — a small business or startup. Securing financing is a critical first step toward independent employment, and according to a Harvard University study, small business loans are down 20 % compared with pre-crisis levels, which is more great news. In 2014, a similar study by The Hartford, found that more small business owners (46% ) believe it’s only slightly, or not difficult at all, to get a loan or other capital for their business. That’s a 39% increase from 2012.
Yet the study also found that over a third of small business owners surveyed used personal sources of funding to start their businesses rather than from traditional sources — bank loans, credit lines, or loans from the U.S. Small Business Administration. I’ve observed that using personal sources — individual savings, retirement savings or capital from family and friends — is not always the best way.
Many new business lending options are available
Today there are a myriad of different types of lenders to choose from. Not to mention, several relatively new funding sources such as peer-to-peer lending sites and crowdfunding websites. Here I want to focus on the different types of lenders, of which there are many. Remember, the most important thing to do before you shop financing options is to have a strong understanding of your business. How does your business operate: Is your business cyclical? When are your busy periods? Could you benefit from paying a vendor early to receive a discount? Should you buy a building verses continue to rent space?
It’s important to figure out exactly how your business will operate and what will be best for the business at this point in time. Next, the most proactive and educated entrepreneurs do their homework. A quick Google search for small business providers on the web yields an overwhelming number of results. Many claim that you can ‘Appy Now!’ online for a loan. There are big banks with big promises, local lenders who offer localized help, and of course, information from the Small Business Administration (SBA).
So what’s best for your business? Here are the main types of financing options available to you:
Traditional business lenders
The most common types of lenders are commercial banks. They have the cheapest money to loan (meaning they carry low interest rates) and give more freedom on what you can do with the money. But it’s becoming more and more difficult to qualify for these programs, particularly from larger financial institutions, and especially for small business owners. Commercial banks like to work with companies that have experienced owners and a profit history. Community banks and credit unions are typically better options for small business owners. They mutually benefit from local businesses, compete with other local banks, and are more inclined to work with business owners to fine-tune a program. The downside to these loans is they typically include shorter repayment times.
If you’re a company that’s a bit more established, these loan types may be right for you. Just be sure to find a bank that can give you the best program for your specific business needs. Some banks are preferred lenders of the SBA and offer many of the SBA’s programs. Most often they carry longer terms and lower interest rates. Therefore, they are great options for businesses with less risk tolerance. If you do go the SBA route, remember that this kind of financing comes with heavy paperwork and therefore takes longer to put into place.
Brokers and alternative lending
There are countless small business loan brokers out there promising low-risk, competitive rates for businesses with varying levels of credit. These funding companies are great options for small businesses at the very early stages and those with less-than-perfect financial status. Another plus side to using these loan providers is they can generally approve a loan for you almost instantly. These companies have some skin in the game and are able to produce tailored programs that best fit small-to-mid-sized business needs. Interest rates can be significantly higher when opting for alternative lending.
When the alternative lending industry began it was seen as a high-risk, high-rate, only-do-it-if-you-have-to industry. Today alternative lending has become more acceptable, and is growing, as additional types of options in that area are emerging. Some of these options include peer-to-peer lending (P2P), which caters to business owners with poor credit profiles. According to an Alternative Lending Market Report, the P2P lending market is expected to grow to $350 billion in the U.S. by 2020. The unsecured lender industry is also exploding. Unsecured business lenders offer flexibility and minimal paperwork. Unsecured business lending is also revenue-driven, and focuses on time in business rather than the principle owner him/herself.
Check small business lenders to ensure credibility
When researching brokers and alternative and unsecured business lenders, do your due diligence to ensure credibility.
Don’t pay any upfront or application fees, and always speak to someone before applying for any loan. During the call, go over what you can afford monthly and your profit margins. Make sure you understand the process thoroughly. This way you know you’re getting into the best program for your business/budget.
Also, check the broker or lender’s credentials. The Better Business Bureau is a great place to check, and also visit trustpilot.com for customer reviews.
My final piece of advice:
Lastly, a great way to ensure a company is credible is to make sure they have their own website. Another indicator is making sure they have their own and email domains. For example, a Gmail address is definitely a red flag.
No matter what type of loan you go after, it’s important to make sure your investment will outlive the loan. For instance, don’t make payments for 10 years on a purchase that only lasted five. Lastly, and once again, do your homework. Be vigilant. Educate yourself in the programs and loans available. Know your financial situation and your goals inside and out. By doing so you will bring to the table the best-matched lender to usher your business into success.