The Small Business Lenders Marketplace: A Complete Guide

Business Guides

Jacques Famy Jr
Review By Todd Millman

These are 5 types of places to search for business funding options for a small business.

  1. Small to Large Banks and Credit Unions
  2. SBA Lenders
  3. Long-Term Business Lenders
  4. Short-Term Business Lenders and Funders
  5. Other Sources, not business loans

In 2020, there is little doubt that small business owners have a lot more options to choose from when trying to access business loans for their business. Ten years ago, the landscape for acquiring a business loan, for the most part, consisted of business owners going to their bank and/or credit union and asking for either a term business loan or a line of credit.

Well, those days are long over. Since the financial crisis of 2008, online business lenders have been getting a larger share of the pie. It's been their job to educate business owners and provide business funding products that look at different data points for making business loans and other products like invoice factoring, business lines of credit, short-term business funding, and more.

Small Business Credit Survey

Source: Small Business Credit Survey, Federal Reserve Banks

Small to Large Banks and Credit Unions

Banks are still the first place small business owners look for financing as they account for 50% of all business loan applications. As mentioned earlier, banks and credit unions used to be the only game in town over a decade ago when it came to receiving a business loan or line of credit.

Due to competition from alternative sources, banks and credit unions are doing a much better job of providing access to working capital to existing small businesses.

Why do banks and credit unions come first when looking for business funding? Simple, banks offer better terms and lower costs. The problem is banks have challenges for those better terms with relatively low approval rates, long waits for credit decisions, and difficult application processes.

Challenges with lenders

Source: Small Business Credit Survey, Federal Reserve Banks

If you look at the lender satisfaction of business owners, small banks lead the pack, followed by large banks.

Lender satisfaction of business owners

Source: Small Business Credit Survey, Federal Reserve Banks

What types of business loans do banks offer?

  1. Term Business Loans: This business loan has a set amount you are approved for that is repaid over a fixed term with a monthly payment, an interest rate, and closing fees. These business loans may or may not be secured with collateral and typically require a personal guarantee.
  2. Business Lines of Credit: A business line of credit is a fixed amount of money credit limit that a business is approved for that can draw as little or as much as the owner would like, at any time, as long as the credit limit has not been reached. Business lines are more flexible than term loans.
  3. Equipment Loans: Equipment loans are specifically used to purchase equipment, and collateral is used with the equipment purchased. The term is fixed over a set amount of months/years, with fixed monthly payments.
  4. Business Credit Cards: Credit cards with both business and personal guarantees. Typically Visa and/or MasterCard)
  5. Approved SBA Lender (in some cases)

SBA Lenders

SBA loans are business loans guaranteed by the Small Business Administration. SBA lenders, approved by the SBA, follow the underwriting guidelines set by the SBA because the government agency will guarantee up to 85% of the loan amount, protecting the lenders from losses from defaults.

The loans are popular because they have attractive terms, such as relatively low rates, fees, and longer terms than other business funding products.

The downside is they have long approval times, many requirements with lengthy paperwork, are not easy to get approved for, and in many cases, require collateral.

3 Most Popular Types of SBA Loan Programs

  • The 7(a) Loan Program: The most popular SBA loan used for general working capital needs, such as refinancing old debt, renovating a location, or working capital for expansion. Repayment terms are up to 10 years for working capital and up to 25 years for commercial real estate loans.
  • The Microloan Program: Business Loans under $50,000, typically used by younger businesses, repayment terms of up to 6 years and helps with working capital for starting and/or expanding a small or younger business
  • The CDC/504 Loan Program: This business loan product is used for a specific purchase, mostly large equipment, and commercial real estate. The loan amounts to 5.5 million, with 10 or 20 years of repayment terms.

1. Long-Term Business Lenders

Long-term business lenders provide traditional business term loans with a fixed amount of capital, with a fixed term, fixed rate, with usually monthly, bi-monthly, or weekly payments.

  • Loan Amount:  $25,000 to $500,000
  • Loan Terms: 1 to 7 years
  • Interest Rates: 7% to 30%
  • Speed of Process: Varies from days to weeks
  • Requirements: Getting approved is rigorous because they do not have government-back guarantees.
  • High Credit Requirements: Typically 680 Fico and above
  • Paperwork requirements: 2 years of business and personal tax returns, business bank statements, profit & loss, balance sheets, use of funds statement, and potentially other financial statements.

In the last decade, some new long-term business lenders have come onto the scene trying to fill a need of business owners who would like terms similar to what is offered by banks and the SBA with a quicker and easier process.

Companies like Funding Circle and Foundation attempt to make the process easier and faster than banks while providing rates that are better than that of short-term loans using a credit algorithm and automated process.

Short Term Business Lenders

2. Short-Term Business Lenders and Funders

The share of applicants that have sought these types of loans and funds has increased significantly over the last decade. It demonstrates the segment that is growing the most due to the higher approval rates than that of banks, lower credit score standards, limited paperwork, and speed of the process.

  • Loan Amounts: $5,000 to $500,000
  • Loan terms: 3 to 18 months
  • Interest Rates: 9% to 35%
  • Speed of Process: Same day to 2 to 3 days
  • Requirements: More simplified and focus on 5 main areas; Industry, time in business, credit rating, and most recent bank statement health.
  • Credit standards: Typically, 600 Fico scores and above
  • Paperwork Requirements: 1-page application, 3 months bank statements

3. Merchant Cash Advance (Future Sale and Receivables Purchase Agreement)

Within this category, another product typically known as a Merchant Cash Advance is a purchase and/or sale of future receivables agreement. This product type serves customers with weaker business profiles, including lower credit, low assets, questionable bank statement health, and financials. This product essentially served business owners a decade ago who would not have had access to capital from banks.

  • Funding Amounts: $5,000 to $500,000
  • Loan terms: 3 to 12 months
  • Factor Rates: 1.14 to 1.49
  • Speed of Process: Same day to 2 to 3 days

This is obviously costly but provides access to capital to underserved business owners in a quick and efficient manner who cannot obtain business funding any other way.

A business owner should exercise good judgment when choosing this product as this type of funding has higher costs than traditional loans and must be paid back within shorter time frames. Used wisely, this product can be a lifesaver for a business.

Other Sources, not Business Loans

The following is a list of small business owners' most common types of external financing and the percentage of owners who utilize these products.

  1. Loan or line of Credit: 55%
  2. Credit Card:52%
  3. Trade Credit: 13%
  4. Leasing: 9%
  5. Equity: 7%
  6. Merchant Cash Advance: 6%
  7. Factoring Invoices: 3%
  8. Other: 3%
  9. Business does not use external financing: 20%
Use of financing and credit graph

Source: Small Business Credit Survey, Federal Reserve Banks

As you can see, it is very common for business owners to use various products to get business funding.

You might be surprised that businesses also use personal sources to get money for their businesses.

Here's a list of the most popular sources, other than business loans, for a business owner's small business:

  1. Personal Credit Card
  2. Personal Term loans
  3. Home Mortgage
  4. Home Equity Loans/Line of Credit (2nd Mortgages)
  5. Family and Friends
  6. Vendor Credit

Whether a personal loan or any other lending product makes sense for your business will depend on various factors, including your business's finances, your personal finances, your credit history, and how much you plan to borrow.

Top Factors Influencing Where Small Businesses Seek Credit

  • Speed of decision-making and the perceived chance of funding were the top reasons firms applied to online lenders.
  • Applicants often choose a lender based on an existing relationship or their chance of being funded than on costs.
  • Loan/line of credit and cash advance applicants reported higher approval rates in the 2018 survey than in previous surveys.
  • The share of applicants approved for at least some financing is highest for merchant cash advances and auto/equipment loans.
  • Loan/line of credit and cash advance applicants had higher approval rates at small banks and online lenders.
  • Medium/high credit risk applicants had higher approval rates at online lenders than at banks.
  • Bank applicants were most dissatisfied with wait times for credit decisions. Online lender applicants were most dissatisfied with high-interest rates.
Graph showing factors influencing where firms apply the most for loans

Source: Small Business Credit Survey, Federal Reserve Banks

Key Takeaways: Small Business Lenders Marketplace

Making the decision to borrow money for your business is obviously an important one and not to be taken lightly. Learning what's available to a business owner regarding business funding is an essential part of that decision but not the only part. Always consider what you are using the money for when deciding on the product type you will need. As you have learned, business loans are not a one-size-fits-all type of thing.

By reviewing the different business funding products available in the marketplace, you will be one step closer to making the right decision.

Jacques Famy Jr

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