Small business owners have many options open to them today. However, they no longer can depend on embracing the traditional path. It is quite impossible for most small businesses to get a bank loan. If statistics were to be believed more than 80 percent of the small business entrepreneurs have been denied loans from the banks. The good news is that a multitude of small business lenders has come up to take the place of the traditional banks. But it is important to know which lender is your best option.
If you are looking for a business loan in the current year, identifying the right lender and determining the best type of loan could be a pretty complicated and confusing process. The very first step towards choosing a business loan would be answering a few critical questions that would help put you on the right track.
What is the exact amount you need?
Why do you need the money?
When do you need the money? Is there urgency?
When do you intend to repay the loan?
Since when are you in this business?
What is the present financial status of your business?
How much collateral are you willing to put up?
The answers to these questions would help you in determining whether you should be pursuing a government-backed loan, a cash advance, a line of credit or loan through a bank, loan or a line of credit offered by an alternative lender.
If you are a small business entrepreneur and you have a good credit score, you could opt for an SBA loan. This would be one of the cheapest sources of funding for you. Usually, it would be taking months for SBA loan application and approval process. The SBA has been attempting to eliminate this issue by introducing effective programs like SBA Express Program for fast turnaround. However, it is thanks to the private organizations that are really helpful in speeding up the loan process. Now you could easily apply online and expect to get funding as early as within just a few weeks.
SBA loans save a lot of time. It is not expensive at all. The SBA loan rates actually range from 5 percent to 8 percent only. SBA loans often have long terms up to 10-year loans so you could enjoy really low monthly payments. The problem with SBA loans is that it is pretty difficult to qualify for them. You would be requiring a profitable business, a credit score above 700 and some sort of collateral to qualify for an SBA loan.
Business Credit Cards
When you require money urgently, nothing could be faster and more convenient than business credit cards. Apart from being convenient, these are not really that expensive contrary to what many people believe. They boast of APRs that average around 15 to 16 percent so they are far less expensive than merchant cash advances or alternative lenders.
Most of these business credit cards would be offering cash back or rewards for advertising, shipping, travel and such business associated expenses. Some business credit cards would be offering 0% interest over a limited period. If you are able to pay off the entire balance within the promotional period, there is no need for you to pay any interest. You could, however, land up in trouble if you fail to pay the full balance each month. Monthly balances and interests would be piling up and creating a huge financial crisis. Moreover, credit limits could be constraining. If you wish to buy something big, it could be exceeding your credit limit.
Marketplace lenders would be matching investors with prospective borrowers. Most of these appeal to only a few specific type of small business entrepreneur. Instances include StreetShares, Funding Circle, and Kickfurther. Funding Circle would be appealing to people with good credit and established businesses. StreetShares would be catering to the prime borrowers, however, they emphasize on assisting the veterans. Kickfurther has been designed precisely for small businesses that require capital for buying inventory. There are many other marketplace lenders best for real estate businesses, franchises and other types of small businesses.
Marketplace lenders are known for a speedy electronic application process. You could get loan approval and funding within a week. They offer very low rates and they would be starting as low as just 5 percent. Marketplace lenders offer relatively shorter period ranging from only 1 to 5 years. All marketplace loans would have their own unique set of qualifications and eligibility requirements for revenue, credit score, and kind of business.
Merchant Cash Advance: A Novel Kind
The merchant cash advance is all about receiving a cash advance and agreeing to repay that cash along with the fees and a precise percentage of your everyday credit card sales. Generally, merchant cash advances should be avoided by the small businesses as they could be quite expensive. But PayPal and Square are offering cheaper merchant cash advances that boast of APRs ranging from 20 percent to 30 percent. These are good for you as the repayment is certainly more flexible and there is no credit check.
Online Alternative Lenders
As per the statistics provided by Morgan Stanley, the alternative lenders have accounted for $7.9 billion in terms of small business loans in the year 2015. This demonstrates a 68% raise from the previous year. There is currently no sign showing any slowdown in the near future. This growth certainly has been accelerated by lenders such as Kabbage and OnDeck.
The greatest advantage being speed, these alternative lenders have become very popular. The application would be taking only a few minutes and there is no need for any elaborate paperwork. If you get loan approval, you would get the funds within a few days. As opposed to this, the traditional loans would be taking weeks and sometimes months to process. The eligibility terms are relatively easier. Even though some online business lenders would be accepting credit scores that are as low as just 500 in reality, your chances of loan approval would be much better provided your FICO score is minimum 600. You should be in the business over a year with a minimum of $50,000 as annual revenue. Moreover, alternative lenders do not insist on any assets to be used as collateral. They would insist on a personal guarantee. Alternative loans could really be very expensive and they would be having APRs that range from 20 percent to 80 percent. They do not offer any prepayment savings and generally, do not charge any prepayment penalties.
Now that you know briefly about the different loan options available to you for your small business, you need to make the right choice. You must realize that ultimately, all businesses are different and unique in their own way. It would surely be a wonderful idea to talk to some other small business entrepreneurs, your accountant, and other financial professionals before determining the best way to get financing.
Author Bio: William Robertson is an experienced financial consultant in a renowned private organization in Pittsburg. He has recently started blogging and enjoys sharing his knowledge with his fans and readers. His posts are very useful because they contain effective tips, tricks, and important resources. He recommends LibertyLanding for hassle-free and easy loans.