Finding the right financing for your business is essential to achieving your business goals. Fortunately, when it comes to finding business financing today, business owners are no longer forced to pursue a traditional bank loan. In fact, there are several different alternatives to a traditional bank loan that business owners can opt for.
While terms and requirements for alternative business finance options will vary from lender to lender, there are key differences between each type of financing that needs to be considered. Read ahead to get started in determining which type of business financing will meet your needs.
SBA (Small Business Administration) loans are provided through the Small Business Investment Companies (SBIC) program. This federal program doesn’t provide the loan sum itself, but does provide guidance for the loan and guarantees a portion of the loan. Given that the loan is partly guaranteed, lenders are more likely to provide a loan to small business owners through the SBA.
There are three main different types of SBA loans which are designed to meet different needs. These loans can be more competitive than other alternative business financing options and have a more demanding application process. Additionally, the response time following an application for an SBA loan is relatively long and can take up to months.
Typical terms of an SBA loan:
- Loan term varies from 10-25 years, depending on the loan purpose
- Loan amounts range from $5,000 to $5 million
- Loan terms have competitive low rates starting in the single digits
Typical application requirements for an SBA loan:
- The application process for SBA loans are more rigorous than most online lenders
- Several forms of documentation are required such as tax returns and debt schedule
SBA loans are best for:
- Business owners seeking a loan with reduced underwriting requirements
- Loan seekers who can wait for a longer duration to receive funding
- Loan seekers with a strong credit history
An option for an SBA loan includes:
- Main Street Finances Loans
- Reputable marketplace with solid customer service
- A lender network of over 30 lenders and partners
- Quick funding for businesses with poor credit score
- Regular payments help to build business credit profile
Short-term loans are provided in a lump sum and repaid with interest within a relatively short period of time. Short-term loans are often used to cover unexpected costs or short-term projects and can provide cash quickly—within as little as 24 hours.
Typical terms of a short-term loan:
- Interest rates can start as low as 8%, but are typically higher than long-term rates
- Most short-term loans have a duration of one year, but can be as short as 90 days
- Loan amount can range from $2,500-$500,000
Typical application requirements for a short-term loan:
- It’s typical for a lender to require having been in business for a designated amount of time (1-2 years). However, some lenders will provide short-term loans to start-ups
- Strong credit history
- Borrowers may be asked to put down collateral
- Lenders may require that the business has a minimum business income for a set period of time
Short term loans are best for:
- Borrowers who need a loan quickly
- Seasonal businesses that needs short-term options to meet the demands of their cyclical business
Options for short-term loans include:
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Merchant cash advances
Merchant cash advances provide you with fast access to funds. Unlike other loans, merchant cash advances are borrowed against your future earnings. Rather than a monthly payment, merchant cash advances are paid with a daily percentage of credit sales.
This business loan type will have lower payments when sales are low, and higher payment when sales are high. The fact that merchant cash advances don’t have a fixed payment is appealing to some borrowers.
Keep in mind, merchant cash advances are not regulated on a federal level and can cause a cycle of debt due to the way they are structured.
Typical terms of merchant cash advances:
- Frequent repayments on a weekly or daily basis
- Loan amount ranging from $5,000 - $250,000
- A loan term of up to two years
- Higher loan costs with interest rates and fees starting at 18%
Application requirements for merchant cash advances:
- Relatively lenient loan application requirements
- May require bank statements within the past year, however typically does not require submitting as much paperwork as other loan types
Merchant cash advances are best for:
- Getting financing quickly
- Unsecured financing
- Businesses that have high credit card sales
- Borrowers that need lenient loan terms due to low credit, lack of collateral, or limited business history
An option for merchant cash advances includes:
- Lendio an online small business loan marketplace that provides a range of loan options including merchant cash advances
Business Term Loans
Business term loans are often used for business financing. Online lenders provide a sum of money upfront which the borrower pays off according to established terms, usually with interest in a given time frame. Business term loans are typically used for a one-time, specific purpose.
Typical terms of a business term loan:
- Loan amount as high as $1 million
- 1-5 year loan term
- Fixed rates
- May have prepayment fees
Application requirements for a business term loan:
- Sometimes require collateral
- May require that borrowers have been in business for a longer duration and have higher revenues than other types of loans
Business terms loans are best for :
- Procuring a larger investment upfront
- Borrowers that want a smaller monthly payment over a longer period
- Flexibility for how to use the investment
Options for business term loans include:
Business Line of Credit
A business line of credit can afford flexibility and convenience compared to traditional loans. This type of business loan allows a borrower to borrow up to a certain amount which is to be repaid with interest.
Unlike other types of business financing, a business line of credit allows a borrower to use only as many funds as they need at a time. A business line of credit may come with additional fees beyond a traditional loan, although it can offer benefits that most loans don’t, such as a rewards program.
Typical terms of a business line of credit:
- May be secured or unsecured
- Loan amount ranging from $1,000 to to as high as $1 million
- 6 months - 5 year loan term
- Varied interest rates, with rates as low as 8% and as high as 25%
Application requirements for a business line of credit:
- Borrowers may be eligible for a business line of credit even if they don’t have a strong credit history
- Business history of 6 months
- Business revenue requirements, typically a minimum of $50,000
A business line of credit is best for:
- Flexibility because it can be used for small or large purchases, and borrowers only pay interest on the funds they withdraw
- Borrowers who are interested in capitalizing on rewards programs
- Borrowers who don’t want to put down collateral
- Seasonal businesses, due to the ability to renew - business owners can withdraw funds, pay them back (with interest) and withdraw again as needed
Options for a business line of credit include:
Equipment loans provide financing to buy equipment that you need to run your business—from heavy duty machinery to office equipment and everything in between. These loans have additional considerations, such as the life of the equipment.
Typically, the equipment is used as collateral for the equipment loan, which makes the loan easier to obtain. When applying for an equipment loan, it’s important to consider how the life of the equipment compares to the duration of the loan, as well as how the equipment will contribute to monthly revenue compared to its monthly payment. Interest rates and terms are likely to be affected by the value of the equipment.
Typical terms of equipment loans:
- May vary based on the value of the equipment
- Loan amounts can go as high as $5 million
- Loan duration from 1-5 years
- Interest rates as low as 8% and as high as 30%
Application requirements for equipment loans:
- May include a down payment for the equipment
- Minimum amount of time for having been in business (likely 1 year)
- Minimum required revenue
- Equipment quote
Equipment loans are best for:
- Business owners that want to own their equipment, rather than lease it
- Business owners who have relatively weaker credit scores
An option for an equipment loan includes:
- Lendio, an online small business loan marketplace that provides a range of loan options including equipment loans
Every business owner has a unique vision for their business and wants to find the best financing option to drive their company forward. Alternative forms of business financing provide much needed options that allow business owners to find the loan that will ensure their success.
In addition to providing more options, alternative business finance options generally have less stringent application requirements than traditional bank loans. Within each different type of alternative business financing there are a range of terms and requirements which vary from lender to lender.
As with any loan, it’s imperative to shop around. Take the time to compare loan types, lenders, and loan offers to find the right fit for your business.