The Small Business Lenders Marketplace: A Complete Guide
December 2nd, 2019 by Advance Point Capital
These are 5 types of places to search for business funding options for a small business.
- Small to Large Banks and Credit Unions
- SBA Lenders
- Long Term Business Lenders
- Short Term Business Lenders and Funders
- 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 ask for either a term business loan or 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 | 2019 REPORT ON EMPLOYER FIRMS page 16] https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf
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 in providing access to working capital to existing small businesses.
Why banks and credit unions 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 wait for credit decisions, and difficult application process.
[SMALL BUSINESS CREDIT SURVEY | 2019 REPORT ON EMPLOYER FIRMS page 20] https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf
If you look at the lender satisfaction of business owners, small banks lead the pack, followed by large banks.
[SMALL BUSINESS CREDIT SURVEY | 2019 REPORT ON EMPLOYER FIRMS page 21] https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf
What types of business loans do banks offer?
- Term Business Loans- This type of business loan has a set amount you are approved for that is repaid over a fixed term with a monthly payment and an interest rate and closing fees. These types of business loans may or may not be secured with collateral and typically require a personal guarantee.
- 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.
- Equipment Loans-Loans, which are specifically used to purchase equipment and collateral, are used with that specific equipment purchased. The term is fixed over a set amount of months/years, with fixed monthly payments.
- Business Credit Cards-Credit cards with both business and personal guarantees. Typically Visa and/or MasterCard’s)
- Approved SBA Lender (in some cases)
SBA loans are business loans guaranteed by the Small Business Administration. SBA lenders, which are 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 and fees as well as 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 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 business, 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 pieces of equipment and commercial real estate. Loan amounts up to 5.5 million, repayment terms of 10 or 20 years.
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 Amounts $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 to get approved are rigorous because they do not have government back guarantees.
High Credit Requirements Typically 680 Fico and above
Paperwork requirements 2 years 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 Fundation 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 and Funders (also known as Online Business Lenders)
The share of applicants that have sought these types of loans and funds has increased significantly over the last decade and 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.
Short Term Business Loans
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 are more simplified and focus on 5 main areas; Industry, time in business, credit rating, most recent bank statement health.
Credit standards: Typically 600 Fico scores and above
Paperwork Requirements: 1 page application, 3 months bank statements
Merchant Cash Advance (Future Sale and Receivables Purchase Agreement)
Within this category, there is another product typically know as a Merchant Cash Advance, which is a purchase and or sale of future receivables agreement. This type of product serves customers with weaker business profiles that include lower credit, low assets, questionable bank statement health, and financials. This product essential serves business owners a decade ago who would not have 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 with 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 the most common types of external financing used by small business owners and the percentage of owners who utilize these products.
- Loan or line of Credit: 55%
- Credit Card: 52%
- Trade Credit: 13%
- Leasing: 9%
- Equity: 7%
- Merchant Cash Advance: 6%
- Factoring Invoices: 3%
- Other: 3%
- Business does not use external financing: 20%
[SMALL BUSINESS CREDIT SURVEY | 2019 REPORT ON EMPLOYER FIRMS page 7] https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf
As you can see, it is very common for business owners to use a variety of products to get business funding.
What you might be surprised to know is that business also uses 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:
- Personal Credit Card
- Personal Term loans
- Home Mortgage
- Home Equity Loans/Line of Credit (2nd Mortgages)
- Family and Friends
- Vendor Credit
Whether a personal loan or any other lending products makes sense for your business will depend on a variety of factors, including your business’s finances, your personal finances, your personal 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 more often chose 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.
[SMALL BUSINESS CREDIT SURVEY | 2019 REPORT ON EMPLOYER FIRMS chart page 17-19] https://www.fedsmallbusiness.org/medialibrary/fedsmallbusiness/files/2019/sbcs-employer-firms-report.pdf
Small Business Lenders Marketplace: The Takeaway from this Guide
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 in terms of business funding is an essential part of that decision but not the only part. Always consider what you are using the money for when making decisions on the type of product you will need. Business loans are not a one size fits all type of thing as you have learned.
By reviewing the different business funding products available in the marketplace, you will be one step closer to making the right decision.