Whether you are funding a start up or looking to grow your business to the next level, there are several sources of small business loans that can fit your needs and your borrowing ability. Which sources is best for you depend on how much capital you need, your financial circumstances, how long you need it and how much in interest charges you are willing to pay.
Bank Business Loans
Banks offer businesses two ways to access capital: Term loans and lines of credit.
Term Loans
Term loans make capital available now in the form of a fixed loan for a term of one to seven years. The interest rate is usually fixed, though some loans come with variable rates. The loan is repaid in equal, monthly installments and can be repaid early without penalty. For small business owners, banks often require some form of collateral or a personal guarantee, or both. Businesses should be able to demonstrate strong cash flow with good prospects for growth. Because banks rely on a personal guarantee, business owners should have very good to excellent credit. Generally, bank term loans offer the lowest rates because they are collateralized.
Line of Credit
A line of credit makes capital available whenever it’s needed. A business must qualify for a fixed amount of capital, which is then held by the back as an open line of credit. Interest is charged only on amounts drawn from the line. Generally, lines of credit can be more difficult to qualify for than fixed term loans. Rates on lines of credit are higher than term loans because the are not collateralized.
SBA loans
The Small Business Administration (SBA) will guarantee loans made by designated banks to small businesses that meet certain qualifications. The loans offer more favorable and flexible terms because the SBA assumes a portion of the bank’s risk. Small businesses with a strong business plan and good prospects for growth can qualify.
Online Lenders
With the advent of the Internet, online lenders have proliferated in the last several years. Small businesses now have a range of online lending sources to choose from, including marketplace (P2P) like Lending Club and Prosper, and direct lenders, such as On Deck and Kabbage. The advantage of working with online lenders is they don’t rely on a business’ credit standing. In most cases, getting a fixed term loan requires that the business be in operation for at least a year, have a minimum of $50,000 in annual revenue, and that the business owner have a minimum credit score of between 600 and 650. Depending on the strength of the qualifications the interest rate can range from a low of around 6 percent to as high as 35 percent.
Another big advantage of online lenders is that the loan application and approval process is quick and easy, with loan funding occurring within a couple of business days.
Invoice Factoring
Factoring is a popular, but expensive, way to obtain short-term financing. In essence, a factor (lender) will loan a business money that its customers owe the business in the form of receivables. A business can get up to 90 percent of its 60-day receivables paid in cash today and, when the customers pay their invoices, the factor collects the money and repays the business the amount invoiced less a three to five percent fee.
The advantage of factoring is the lender doesn’t rely on the creditworthiness of the business to approve a loan. Instead, it relies on the creditworthiness of the business’s customers paying the invoices.
