Lowest Rate Financing
At some point nearly every business will seek some sort of financing to help a new business start, or to help a growing business with its operations. Some small business owners will seek to inject their own personal capital into the company. Other owners may opt to use personal or business credit cards to help meet their financial needs. Then there are others that will look to raise funds for their company by selling a piece of their company (equity) in exchange for the financial help. Each of these types of financing is different than the next, and its value depends upon the circumstances facing the small firm. In this article we are going to focus solely on debt financing and how to find the lowest rates associated with the borrowing costs.
What is Debt Financing?
Quite simply, debt financing is a type of financing in which the borrower or borrowing company receives money from a lender and agrees to pay back the amount (plus interest and/or fees). Debt financing can be both secured and unsecured by business or personal assets. Secured business loans are often collateralized with business assets like commercial real estate, machinery & equipment, account receivable, inventory and all other business assets. Unsecured business loans obviously don’t require collateral, but they are highly-dependent on the borrower having excellent credit and the businsess having strong financials and overall profitability.
What is a Small Business?
While there are a number of metrics that may be used to define what is a small business, the Small Business Administration’s defines a small business as a for-profit firm that is independently-owned. Typically, most define a small business as a company with fewer than 100 employees that generates less than $5 million in revenue each year. Companies that generate revenues over $5 million each year are generally considered the next tier up called the “lower middle market”.
What is a Small Business Loan?
A small business loan relates to debt financing facilities provided to small firms. Loans for small businesses include financing from large banks, small banks, community banks, alternative lenders, fintech lenders, marketplace lenders and some cash advance providers. Charactoristics of debt financing loans vary greatly depending upon the lender, and the use of the loans. Small business debt financing uses include:
- Business acquisition
- Real estate purchase
- Commercial mortgages
- Debt consolidation
- Debt refinancing
- Working capital
- Payroll financing
- Business Expansion
- Equipment and Machinery purchases
What is an Interest Rate?
A rate is simply the amount of interest the bank or lender will charge the borrower in exchange for debt financing. Generally, the interest rate is calculated by multiplying the borrowing amount by the rate – which is the cost the lender charges the borrower for financing (not including fees). Interest rates can be both fixed and adjustable. A fixed rate simply means the rate will stay the same throughout the life of the loan, with no adjustments at all. An adjustable rate loan will see the rates fluctuate depending upon Federal Reserve Board actions.
What are Terms?
A term is a specific payment schedules used to repay a loan. The payment schedule is agreed upon before financing occurs and the payments happen over the course of that schedule. Terms can vary in length and frequency, with payments happening on a monthly, weekly and even daily basis depending on type of term loan or cash advance. The great majority of traditional lenders have monthly repayment schedules, while many alternative lenders will have weekly payments. Cash advance lenders who offer term loans will often collect repayment on a daily basis by use of automated clearing house.
What are Fees?
Fees are additional costs of financing that the lender will charge the borrower for the transaction. These fees are usually detailed in the loan documents and both parties agree to them before funding occurs. Such fees include:
- Underwriting fees
- Origination fees
- Banking fees
- Due Diligence
- UCC search
- Title search
- Appraisal recertification
- Closing costs
- Collateral monitoring fees
- Wire transfer fee
- SBA guarantee fee
- Facility servicing fee
What are the Small Business Loan Options?
Rates and terms among small business lending options vary greatly depending upon the commercial lender you’re using. Traditional lenders almost always offer rates that are much lower than alternative lenders, and the reason for that is that conventional lenders aren’t willing to take much risk. By reducing their risk, they are able to offer very affordable financing, whereas non traditional lenders take more risk – in many cases, tremendously more risk – and those risks are priced into the loan. Quite simply, the higher the risk, the higher the rate. Below we will rank each type of business lender in terms of lowest to highest rates:
Comparing Small Business Loan
|Bank||4-10%||3-7 years||14-30 days|
|SBA||6-10%||3-7 years||10-30 days|
|Line of Credit||5-15%||1 – 3 years||7-30 days|
|Alternative||6-25%||1-5 years||5-7 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
Bank Small Business Loans
Traditional banks offer the lowest rates of all lenders, with some banks able to offer rates as low as 4% for well-qualified borrowers. As mentioned previously, banks are able to offer such low rates because they expose themselves to much less risk that non traditional lenders. Therefore, in order to qualify for a bank loan or line of credit, the small business needs to have exceptional credit and display a clear ability to service their debt.
SBA Small Business Loans
SBA lenders are bank lenders for the most part (with some being non-profit community lenders) who offer low-rate business financing with the aid of the Small Business Administration. The SBA agrees to backstop a portion of the loan so as to reduce the lender’s risk exposure. By reducing the lender’s risk, the hope is to increase the amount of lending provided to small businesses from banks.
Marketplace (Fintech) Small Business Loans
Alternative mid prime lenders offer rates that aren’t as low as conventional banks, but do offer rates that are both affordable and much easier to access. Alternative lenders offer true APR amortizing loans that can start in the single digits with terms that last as long as 5 years. The funding process is much quicker than conventional lending application and approval processes, but there are generally more fees than a bank would charge.
Asset Based Small Business Loans
Asset based loans (ABLs) have rates that can be nearly bank-rate, and can be as expensive as cash advances – so its difficult to rank for rate affordability. Asset based loans may use many types of collateral, ranging from accounts receivables, commercial real estate, inventory, machinery and equipment, and even personal real estate. If you’re able to get an asset based loan through a bank, the rates will be very affordable. But if you have to use an alternative asset based lender, the rates can be as high as 100% APR (or more).
Small Business Cash Advances
Business cash advance lenders purchase a portion of your future receivables at a discount and pay you upfront. Since these aren’t loans, but purchases, the “lender” is taking considerable risk. With that increase risk comes a much higher rate than a bank would offer. Cash advance rates aren’t calculated using the more traditional APR they are, instead, calculated using a “factor rate”.