Small Business Lending Options
The state of small business lending is imperfect but improving from an access standpoint. More and more small companies are finding it easier to acquire financing for their business, even if the rates and terms aren’t always the best. Competition among online and alternative lenders are making it hard for traditional lending institutions to compete for business. While traditional lending institutions are doing their best to streamline their small business lending approval processes, they still find it hard to compete with the ease of the funding process offered by alternative and institutional business lenders.
While there are thousands of different small business loan products, the most common funding options include:
- Term loans
- Lines of credit
- SBA loans
- Alternative business loans
- Invoice financing
- Cash advance funding
| Rates | Terms | Funding | |
|---|---|---|---|
| Bank | 6-10% | 3-25 years | 30-60 days |
| SBA | 6-10% | 5-25 years | 10-60 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 |
| Invoice Finance | 1-2% weekly | 1 – 90 days | 1-3 days |
Bank Small Business Lending
Bank term loans and lines of credit offer the best rates and terms of all the small business lenders. Bank interest rates usually stay in the mid to upper single digits, and have terms that range from 1-10 years. For commercial real estate mortgages, banks can offer terms and amortization periods up to 25 years. While traditional banks offer the best rates and terms, they also have the most stringent credit, cash-flow and collateral requirements of all the small business lenders. Business and financial documentation requirements are also substantial, and usually require:
- 3 years business tax returns
- 3 years financial statements
- AR and AP aging schedules
- Debt schedule
SBA Small Business Lending
SBA loans are loans provided by large banks, small banks, community banks and non-profit lenders that provide traditional term loans and lines of credit to new and existing businesses. A lender will provide the loan to the small business, and the United States Small Business Administration agrees to cover a large percentage of the lender’s loss should the small business default on their loan. By agreeing to provide a SBA guarantee, the SBA hopes to increase small business lending by reducing the lenders’ risk.
- 3 years business tax returns
- 3 years financial statements
- AR and AP aging schedules
- Debt schedule
- Personal tax returns
- Personal financial statements
Alternative Small Business Lenders
Mid Prime alternative small business lending is a form of business funding that is the middle ground between bank-rate financing, and high-interest merchant cash advance lending. Mid prime alternative offer affordable short and medium-term financing to small businesses without nearly the credit and documentation requirements that bank lenders require, and funding can be completed within 1-2 weeks. Documentation required to get a business funded with a mid prime loan include:
- Credit Application
- 6 months bank statements
- 2 years business tax returns
- 1 year profit & loss statement
- Debt schedule
- 1 year Personal tax returns
- Personal financial statements
Small Business Invoice Factoring
Invoice financing (also sometimes referred to as “invoice factoring”) is a form of short-term small business financing in which a company uses their unpaid invoices as collateral to obtain a loan. An invoice that is between 1-90 days old is uses as collateral, and the factoring company will forward the owner of the invoice a large percentage of the invoice’s value (minus a few). When the invoice is eventually paid, the factoring company will then forward the remaining balance of the invoice to the small business
- Application
- Unpaid invoice
Small Business Equipment Leasing
Equipment financing relates to any debt lending facility provided to a small business to purchase or lease equipment. Equipment leasing is the most common of all equipment financing options, because of advantages including: not needing to purchase equipment outright, and not being stuck with outdated equipment. Usually an equipment leasing company will purchase the equipment for a business, and then lease the equipment to a company for a period of 3-5 years. At the end of the term the lender usually offers the company the ability to purchase the equipment, or work-out a new lease agreement.
- Application
- Purchase order
Small Business Cash Advances
Merchant cash advance small business funding provides companies with the opportunity to obtain financing they would not be able to obtain from traditional and alternative small business lenders. Merchant cash advances are not loans, but instead are the sale of future bank and/or credit card deposits in exchange for an upfront funding. The merchant cash advance funders will forward an amount of money, and will pay back an agreed amount through the use of daily or weekly remittances directly from the small company’s bank account and/or credit card processing.
- Application
- 6 months bank statements
