Top Small Business Loans
Finding the best possible business loan isn’t easy, especially with thousands, if not tens of thousands of financing options available to small businesses. While some companies like to advertise their loans as the best small business loan options available, that may or may not be the case. Each company has individual needs that require a financing vehicle that is specific to their needs. Finding the right business loan option can be time consuming, and confusing. An internet search for best business loans and funding options may not provide a small business owner with clarity. Many articles written about the topic are posted on website that get paid to refer web traffic to individual lenders, creating an inherent conflict of interest. Rather than offering true expert financing advice, they may be looking out for their own best interest by steering traffic to the few small business lenders that they partner with. Here we will provide you with the best business loan and commercial financing options available to small businesses and firms. Keep in mind, we tend to think of “best business loan” as loans with the lowest rates and longest terms provided by commercial lenders. But we must also take into consideration other factors like ease of approval, speed of funding, least documentation needed for due-diligence and underwriting, etc..
What are the Approval Rates of Different Small Business Loans?
Business loan approval rates are lowest among big banks mainly because they have the strictest credit, cash-flow, and collateral requirements of all commercial lenders. Small banks, credit unions and community banks have higher approval rates than the larger banks mostly because of government-enhanced financing products.
Alternative loans are approved at much higher approval rates than alternative lenders, mainly because these funding companies are willing to take more risk in approving loans that traditional lenders won’t take. But because of the increased risk the alternative lenders have higher rates than traditional lenders.
Bank Loans For Small Businesses
While many online articles will try to sell their lending partners as the best business loans available, that just isn’t the case. Bank loans offer small businesses with the best terms, lowest interest rates, and lowest fees of all small business lenders. Period. A business loan from a large, small, community bank or credit union will always be cheaper than an online alternative small business lender. About the only downside to bank business loan is that banks require requirements to qualify for financing than other business lenders. Bank require higher credit scores, larger amounts of collateral and better cash-flow than all lenders. On top of that, the due diligence process associated with bank financing requires much more paperwork and documentation than other forms of business lending. But if you do qualify for a bank loan, these minor headaches are worth the price of financing.
- Bank Business Loan Rates: 5-10%
- Bank Business Loan Terms: 3-25 years
SBA Lending
While there is a perception that SBA loans are a type of business financing provided directly from the U.S. government, that’s not actually the case. An SBA loan is a loan provided by a bank or commercial lender that is partially-guaranteed by the government. The purpose of SBA financing is to make lending available to small businesses — which is accomplished through the use of the SBA loan guarantee. By promising to cover a large percentage of the lenders’ losses it, in theory, makes commercial lenders more apt to provide financing to small businesses who have marginal credit or cash-flow. SBA financing does have its drawbacks, in that the credit requirements are still higher than most loans, and the required documentation is probably the most of all types of commercial loans. But, there are exceptions like the SBA Express loan program which has a 36 hour turnaround from the SBA and has minimal paperwork. With that having been said, the usual SBA funding time takes 30-60 days depending on the use-of-funds.
- SBA loan rates: 6-8%
- SBA loan terms: 3-25 years
Alternative Business Lending
While there are a wide array of alternative business lenders, when we talk about alternative business lenders, we are generally referring to the online-type offering “loans” up to $500,000. Emphasis must be added when talking about online lenders because many don’t actually lend at all, but use a financing technique that involves the purchase of accounts receivable, credit card sales, invoices and/or bank deposits. Mid-prime lenders on the other hand don’t participate in factoring, but instead offer true loans. A major advantage of getting a loan over factoring is that it usually ends up being cheaper, and the interest rate paid on a loan is tax deductible, as opposed to the cost of factoring. Because they are cheaper than merchant cash advance financing, this type of loan is often used to buy-out the expensive cash advances so they can refinance and consolidate multiple advances in a single affordable loan. While these loans more expensive than financing offered by large, small and community banks, the rates are still relatively affordable, fees are reasonable and terms aren’t too cumbersome, especially as compared to many of the other alternative loan options (like merchant cash advances, factoring invoice financing). And, unlike bank financing, the overall funding time takes days to a couple of weeks.
- Alternative lending rates: 8-30%
- Alternative lending terms: 1-5 years
Equipment Financing And Leasing
Equipment leasing offer businesses with the ability to acquire new or used commercial equipment without having to pay the full-cost of the equipment upfront. This is especially advantageous to companies that need to purchase or replace equipment, but don’t have the necessary capital to make the purchase. Even companies that can afford to make the equipment purchase opt to finance the equipment instead so that they aren’t stuck with outdated equipment after a few years. Typically under an equipment leasing agreement a financing company will purchase the equipment for a business, and then lease the commercial equipment to the business for a period of time. Generally, at the end of the agreed upon term, the equipment leasing company will then offer to sell the equipment to the business who had been leasing it.
- Equipment leasing rates: 5-15%
- Equipment leasing terms: 1-7 years
Invoice Financing
Invoice factoring (also invoice financing) is the sale of outstanding business invoices to a factoring company who will then provide the business with an upfront sum of money. After the business submits the invoice to the factoring company, the factor will then forward the business between 70-90% of the value of the unpaid invoice. At the same time the factoring company will keep a small fee for themselves. Each week the invoice goes unpaid the factoring company will charge 1-2% and when the invoice is finally paid the factor will forward the business all remaining funds.
- Invoice factoring rates: 1-2% weekly
Business Cash Advances
Merchant cash advance financing should always be a last resort when it comes to business financing. While not to be confused with a loan, a merchant cash advance uses “factoring” to purchase a companies future credit card sales or bank account deposits in exchange for fast financing. The rates associated with a merchant cash advance is calculated using a formula called a “factor rate”. When a merchant cash advance company purchases a company’s future deposit, they will take the total price of purchase, and multiply it using a ratio ranging from 1.20 to 1.55, and the business will be responsible for paying back the total amount owed. So a $100,000 merchant cash advance with a factor rate of 1.20 will pay back a total of $120,000 over the course of the agreed upon term. Not included in the factor rate are fees which nearly all merchant cash advance companies charge (usually in the 1-5% range). When you calculate the factor rate along with fees, a cash advance can be incredibly expensive. Add in the fact business advances are usually paid back with 6-9 month terms, when calculated using an APR the rates become exorbitant.
- Factoring rates: 1.16-1.55
- Factoring terms: 3-24 months
Conclusions
Since each company has unique financing requirements, its hard to put a definitive ranking for each and every type of business loan. But we are quite confident in stating that bank loans will always be healthier for a company than alternative lenders. That doesn’t mean that alternative lenders don’t have a place, but they just shouldn’t be the first place to look for financing. And most of all, a merchant cash advance should be an absolute last resort for all businesses. The rates associated with a merchant cash advance is calculated using a formula called a “factor rate”. When a merchant cash advance company purchases a company’s future deposit, they will take the total price of purchase, and multiply it using a ratio ranging from 1.20 to 1.55, and the business will be responsible for paying back the total amount owed. So a $100,000 merchant cash advance with a factor rate of 1.20 will pay back a total of $120,000 over the course of the agreed upon term. Not included in the factor rate are fees which nearly all merchant cash advance companies charge (usually in the 1-5% range). When you calculate the factor rate along with fees, a cash advance can be incredibly expensive. Add in the fact business advances are usually paid back with 6-9 month terms, when calculated using an APR the rates become exorbitant.
The rates associated with a merchant cash advance is calculated using a formula called a “factor rate”. When a merchant cash advance company purchases a company’s future deposit, they will take the total price of purchase, and multiply it using a ratio ranging from 1.20 to 1.55, and the business will be responsible for paying back the total amount owed. So a $100,000 merchant cash advance with a factor rate of 1.20 will pay back a total of $120,000 over the course of the agreed upon term.
Not included in the factor rate are fees which nearly all merchant cash advance companies charge (usually in the 1-5% range). When you calculate the factor rate along with fees, a cash advance can be incredibly expensive. Add in the fact business advances are usually paid back with 6-9 month terms, when calculated using an APR the rates become exorbitant.
