Guide to Choosing a Business Lender

Whether it’s to meet short-term expenses, cover a seasonal lapse in sales, fund an expansion or one of many other reasons, it’s not uncommon for small businesses to look to lenders or investors for funding. Fortunately, in today’s business environment, there have never been more ways to secure the outside funding a business may need, and this guide will help you to choose the right lender for your business.

The flipside of this crowded field of lenders is that it can be confusing for small business owners to decide which business loan lenders are best suited to their needs. Direct business loan lenders such as traditional banks, online business loan lenders and private business loan lenders offer a myriad of options to choose from. But these choices come with questions.

Who gives the best small business loan? Is it better to get loans from business term loan lenders such as banks and online lenders or from private money lenders? What is the best way to borrow money for a business? The answer simply depends on the unique needs of the small business.

Choosing the Right Loan for Your Small Business

Here are several factors that enter into the process of deciding which small business loan is the best fit for a small business:

  • The interest rate and the amount of interest a small business owner is willing to pay;
  • How quickly the small business needs the money;
  • The amount of money the small business needs;
  • And items such as credit score, revenue, time in business, debt and the like.

The sooner a small business needs the funding, the higher the interest rate is likely to be. As such, the longer the timeline a small business has until it needs financing, the lower the interest rate it may eventually pay. The Small Business Administration (SBA) or traditional banks provide long-term financing options. But for a small business that is desperate for cash today, a loan through an online lender at a high interest rate may be its only recourse.

The type of financing a business requires is typically determined by the type of need that it’s attempting to fill. A business that’s planning an equipment purchase or an expansion into another location needs a different sort of financing than a business that needs a quick influx of cash to meet payroll. As such, the first step in deciding what type of loan a small business needs is determining whether it requires long-term or short-term financing.

Long-term financing is typically defined as any business loan with a term of five or more years. Loans are considered short-term if they are 3-36 months in length. Small business loans are normally repaid in installments over the term of the loan. Depending on the type and length of the loan, lenders may require collateral to guarantee a small business loan.

For those businesses that need assistance deciding on a business loan, Biz2Credit is an example of a firm that can help find the appropriate loan.

Types of Business Financing Options

Small business financing options are many and varied, and they are not limited to term loans. Here are a few popular options.

  • Traditional Bank Loans. Terms can range from 1-20 years. Loan amounts and rates vary, and approval can take less than four months if the applicant has acceptable credit.
  • Online Loans. Many small businesses prefer online lenders because of the speed with which loans can be approved and funds delivered. For instance, some lenders offer same-day approval and funding within 48 hours. Rates, however, tend to be higher than bank loans. Online lenders tend to look more closely at revenues than credit ratings.
  • Microloans. Newer businesses that need smaller loan amounts tend to be good for microloans. Loan amounts range up to $50,000. Interest rates skew high, comparable to some credit cards. The turnaround time for approval tends to be within three months of application.
  • Merchant Cash Advance. Available amounts range from $5,000 to $25,000 and are based on revenues. The approval process is weighted toward the revenues and activity of a small business, and approval can come within 24 hours.
  • Cash Flow Loans. With this type of short-term financing, a small business mainly has to prove that it has strong revenues to give lenders confidence in its ability to repay the loan. The flipside is that cash flow loans can be one of the most expensive lending options for a small business. Cash flow loans can be constructed so that, between interest and fees, a small business can eventually pay the equivalent of anywhere from 11- 90% in annual percentage rate fees.
  • Vendor Financing. This option is not a small business loan, but normally takes the form of a deferred loan from a vendor with whom a small business already does business. With this often-overlooked option, small business owners can get between $1,000 and $10,000 from a vendor. While the vendors might not charge interest, the funds must be repaid quickly. This time period typically ranges from 10 to 30 days. In situations where interest is charged, the rates are generally higher than rates charged by traditional banks.
  • Lines of Credit. Since a business line of credit can be borrowed against many times, it’s typically a popular financing option for many small business owners. Credit score and business revenues are both considered when it comes to applying for a business line of credit, which can be difficult to qualify for. Business lines of credit range from $1,000 to $10,000.

How to Apply for a Small Business Loan

While the application process can vary a bit from lender to lender, small business owners will typically have to provide the following basic information when applying for a small business loan:

  • Identification. A driver’s license or a passport will suffice.
  • The date the business started. This can be either the date the business received its business license or its Employee Identification Number (EIN) from the Internal Revenue Service. For corporations, the date the business incorporated should be used.
  • The EIN of the business. Sole proprietors can also use their Social Security number but, for a variety of reasons, an EIN is recommended. Contact the IRS for a free EIN.
  • The address and phone number of the business.

Respecting the application requirements of lenders is a must in order to qualify for a small business loan. In many cases, small business loan applicants will also have to provide proof of revenue from their business. This generally can be done by providing bank statements dating back 3-6 months, business tax returns or other up-to-date financial statements. Lately, however, lenders have started to ask small business owners to link their business account so that they can better analyze their business revenues.

Depending on the type of financing a business is seeking, other requirements may be involved. For instance, loans that require collateral such as real estate or machinery, may require an appraisal of the collateral in order to be approved. Some lenders may also require a personal credit check; others may also conduct a business credit check. Good credit is essential to qualify for a small business loan.

The length of the approval process can vary according to the type of lender. Traditional banks tend to take longer to scrutinize the application and may require more documentation. For instance, it’s not uncommon for banks to ask for financial statements in addition to the small business loan application. This lengthens the time between application and decision.

Online lenders, on the other hand, normally make a preliminary decision much quicker than banks, although they may ask for more documentation to underwrite the loan. Upon approval, small business owners can receive funding from an online lender in a matter of hours. Funding from banks may take two or three days to become available.

A down payment or collateral is required by some lenders. Small business owners should make sure they have enough assets on hand to qualify for such loans before they apply.

Getting a Small Business Loan to Start a Business

Since startup businesses have no record of success or revenue, getting a small business loan can be difficult. The only criteria a potential lender has at its disposal to determine the creditworthiness of a startup is the personal credit score of the applicant.

Startups who find it difficult to get a traditional small business loan may find a suitable option in SBA-guaranteed loans. Lenders who offer SBA-guaranteed loans can be found through SBA’s Lender Match. The SBA also offers microloans that have less barriers to entry, which can be helpful for a startup business, but these loans max out at $50,000.

It’s not uncommon for a business to be asked to put up collateral in order to receive a loan. Doing so can be risky, since equipment, property or inventory can be seized should the loan not be repaid. That’s why unsecured business loans have become a more pragmatic option for startups. Unsecured loans allow a loan application to be approved bases on factors such as credit scores and time in business without involving collateral.

Getting a Small Business Loan to Buy a Business

Not all small business owners built their business from the ground up. Many simply purchased an existing business. In these cases, the type of funding a business acquisition loan can provide may be needed. A business acquisition loan can also be used to buy out partners in a business, or to finance the purchase of a franchise. There are also small business acquisition loans available for startup businesses.

Business acquisition loans are available from many different sources. They tend to have flexible payment terms and rates. The conventional term loans that banks typically offer rank among the most popular loans to use to acquire a small business.

SBA loans can also be a good option for those looking to start a small business. SBA loans are guaranteed by the federal government, which makes them an ideal fit for small business owners who might qualify for a traditional bank loan. Because they are guaranteed, SBA loans also offer lower rates and more favorable repayment terms. The process of approval for an SBA loan can take weeks or even months, depending on the type of SBA loan involved.

Best Online Business Lending Companies

Since their inception, online lenders have become the preferred choice of many small business owners. That’s because, for the most part, online lenders can offer more convenient application and funding processes, faster approval, more competitive fees and better loan terms than traditional banks. it’s only natural to wonder who is the best small business online lender. There is no single answer to this question. The answer, again, depends on the needs of the small business and what type of funding it’s looking for, be it an SBA loan, microloan, same-day funding and such. There are plenty of third-party ratings of the top business lending sites from credible sources such as Investopedia.com and businessnewsdaily.com.

According to U.S. News and World Report, Biz2Credit is the top-rated choice for offering the most loan options and is ranked first by money.com for fast funding. Sites like these can help you identify your best-fit funding provider based on your business or your financing needs.

How Do You Finance a Private Company?

In addition to loans from banks and online lenders, funding from personal savings and friends and family – in addition to private equity through venture capitalists and angel investors – are viable options for funding a private company.

Typically, however, private equity (PE) is the investment of capital into private equity companies that are successful and established. Private equity firms raise capital from investors called limited partners (LPs). Examples of LPs are insurance companies, pension funds, and high net worth families and individuals. The PE firms then use those funds to invest in businesses that appear ready to grow.

For most small businesses, less complex financing arrangements are normally sufficient.

How Can I Get a $500,000 Business Loan?

Most of the best business loan providers offer business loans of $500,000 or more. This includes traditional bank, online lenders and credit unions. Banks tend to offer competitive rates on business loans of this amount to established, profitable businesses. Online lenders and SBA loan providers might be a better fit for newer businesses.

While the application process varies according to lender, comparing items like the APR, terms of requirements of each lender’s loan offering is a good way to start to determine which lender is best for a business.

In order to qualify for a loan of $500,000 or more, a business normally needs to meet the following criteria:

  • Must have been in business for at least one year. Lenders require a track record of success and business experience to approve larger loan amounts.
  • Good personal credit score. A personal credit score of 670 or higher is typically required for $500,000 in business financing. Business lenders look more closely at personal credit scores than business credit scores. The higher that a credit score is for a business owner, the more loan options they generally have to choose from.
  • Minimum annual revenue. No matter what size of loan a business is seeking, lenders want to be sure that they will be repaid. While the amount revenue needed can vary between loans and lenders, it’s not uncommon that a business that’s looking for a $500,000 will need millions in annual revenue.

Businesses that can meet the strict qualification requirements for a $500,000 loan are likely to qualify for a competitive rate. For example, businesses with acceptable revenues and good credit scores can expect an APR at the lower end of the range, perhaps around 10 percent. For an SBA loan, rates are capped at the prime rate plus 2.25 percent to 2.75 percent for most programs. The actual rate can be determined the term of the loan.

What is a Private Business Loan?

A private business loan is a loan issued by a lender other than a bank. Typically, these loans come from family, friends, venture capitalists, angel investors and online lenders that don’t involve a traditional loan process. Because private lenders can offer the ease of doing business, along with reliability and flexibility that banks normally can’t, private business loans are preferred by some small business owners. In addition, private lenders also provide greater speed and convenience than their traditional counterparts.

Private lenders may fund many different varieties of loans, with two of the most common being real estate loans and personal loans.

How Do Private Lender Loans Work?

Getting a business loan from private lenders works just like loans from banks or credit unions. A small business owner receives funding to meet a particular business need, then pays the amount borrowed back in installments, along with an agreed-upon interest rate.

Sources of Private Business Loans

Since they offer personal loans, online lenders are private lending companies. These companies operate exclusively on the internet.

Individuals can also serve as private lenders. In such cases, these lenders may be looking to make more interest on their money than it would earn in a bank. They could also simply be friends and relatives looking to help.

In some cases, private business loans can come from strangers in the form of accredited investors. Such investors typically have to be convinced that the investment is worthwhile. There are, however, lending sites online that help connect small business owners with potential investors.

It’s important to note that private lenders must comply with the usury laws and banking laws of the states in which they operate. This means that the amount investors are able to lend may be capped by the state they are doing business. In addition, the interest rates they can charge may also be regulated and capped.

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