As non bank lenders continue to gain market share across different loan segments, we wanted to give a complete overview of online small business lending and how diverse the options are for all types of businesses today.
Understanding your company and where you fit within the ecosystem of small businesses is still the most important question you can ask. The options available vary in loan size, interest rates and term length dependent on the type of business you run. Though one thing is certain, today there is such a wide array of options available that most business owners should be able to secure funding.
SBA or Small Business Administration loans are considered some of the best funding options available for their low interest rates, though their detailed paperwork and lengthy approval process tend to limit the types of firms who can secure these loans. There are three different types of loans offered by the SBA; 7(a) SBA Loan Program, CDC/504 SBA Loan Program and the less used Microloan Program. We will delve deeper below but these loans are designed for companies with very good credit, collateral and a solid business plan. The loans are not delivered directly by the SBA, the SBA acts as a guarantor so the banks can then allocate some of their small business lending to the SBA programs. Some of the top lenders in this space include Wells Fargo, US Bank and JP Morgan Chase; national, regional and community banks are the main lenders of SBA Loans.
7(a) SBA Loan
Loan Amount – $5,000 – $5,000,000
Loan Term – 5 – 25 years
Interest Rates – 6 – 13%
This is the most well known and most commonly used loan that the SBA program offers. This loan can be used to expand a company, finance equipment, purchase real estate or to make an acquisition. Businesses consider SBA loans as the top financing product to get approved for, however the process of applying and ultimately being approved is quite extensive. Companies need to provide financial statements, explanation of use of proceeds, details on collateral and full business descriptions. The process is still very similar to getting a traditional loan through a bank as the entire period can last about 90 days.
CDC/504 SBA Loan
Loan Amount – $5,000 – $5,000,000
Loan Term – 10 – 20 years
Interest Rates – 5 – 8%, rate determined after 45 days
This can be considered one of the more complicated loans a small business can apply to get. The 504 program as it is more commonly known, is not used nearly as much as the 7(a) program and is focused on companies who need the capital to acquire assets, expand or update certain aspects of their business. The loan consists of three parts; 10% from the borrower, 50% directly from a bank and the remaining 40% is funded by a Certified Development Corporation. The interest rate is not calculated at the time of the loan because the the CDC groups all of their loans into a pool for investors to buy at auction, when the auction takes place an interest rate is then calculated based on the investor credit model.
Loan Amount – $2,500 – $5,000,000
Loan Term – 3 – 18 months or 1 – 5 years
Interest Rates – 6 – 30%
Term loans tend to be the most common loans and easiest to understand – a business borrows money for a specific reason then repays the loan over a period of time. These loans can typically be divided up into long term or short term options. Long term loans are typically for companies with better credit and more collateral. More established companies receive the long term loan and usually pay back monthly with an interest rate that can be fixed or variable. Short term loans are often used by companies with less than stellar credit, they fill a short term need and cost a great deal more than long term loans. Short terms loans are typically paid back with daily payments, though the structure can be different for each loan. While banks are a main source for these loans, the financial crisis constricted bank lending and non bank lenders like Funding Circle, who offers long term loans and recently passed $2.5B in originations, and OnDeck, who originates over $1B per year, were able to fill the space.
Working capital is the most diverse grouping of loans as small businesses can get accounts receivable or invoice financing, merchant cash advance financing or supply chain financing. Each type of financing does have one thing in common and that is sales at your business, these rely on your ability to sell products or services. The biggest lenders in this space include AMEX, PayPal, Square, MarketInvoice and CAN Capital, all of whom have lent well over $1B to small businesses.
Accounts Receivable/Invoice Financing
Loan Amount – up to 85% of invoice amount
Loan Term – businesses pay per week outstanding
Interest Rates – 5 – 12%
Accounts receivable or invoice financing allows businesses to use their sales to to borrow capital for a short period of time. Invoices are usually sent to customers with due dates of 30, 60, 90 or 120 days; companies in turn need steady cash flow to meet different needs and lenders can fill this void by using the invoice as a form of collateral. Financing your business this way can be expensive though, as lenders typically charge processing and factor fees. There are many different ways financing within this space as some lenders operate in a more traditional sense where they pay you upfront for close to 85% of your invoices and other lenders use your business activity to tailor a specific financing option.
Merchant Cash Advance
Loan Amount – $5,000 – $250,000
Loan Term – 3 months – 24 months
Interest Rates – 8 – 40% or more
Merchant cash advance financing is a quick but expensive option for a business to use, there is almost no collateral required and even those with poor credit can qualify. While this tends to be an expensive option, it does serve a sizable need for companies who cannot get approval for more traditional means of capital. The big advantage to using this type of funding is repayment is done by allowing the lender to deduct a percentage of daily credit card sales. While this type of funding is useful for short term needs, it is typically not seen as a good long term option for companies to continue to use.
Supply Chain Finance
Loan Amount – up to 95% of the invoice
Loan Term – short duration
Interest Rates – negotiated between buyer and seller
Supply chain finance is a growing option for companies who are looking for financing options but do not want to incur large fees that usually accompany invoice financing. This option is not a traditional means of lending but rather an alternative for companies who usually have large buyers. Companies are able to essentially sell their invoices for close to full value and in return the lender is able to collect when the invoice reaches full maturity. Companies are typically able to get about 95% of the value of an invoice in return for rapid payment, fees are usually small as buyers tend to be bigger corporations.
Lines of Credit
Loan Amount – $1,000 – $1,000,000
Loan Term – 6 months – 20 years
Interest Rates – 7 – 30%
Line of credit financing is a flexible way for businesses to draw on cash when needed and are only required to pay interest on the amount used. This type of financing is good for companies who have seasonal sales or bumpy sales cycles. There are two types of Line of Credit Financing, the traditional pool of capital to draw on and a business credit card which can act like a line of credit for purchases. Businesses can secure lines of credit from banks who will offer more preferable rates, though their credit models have a higher barrier of approval or they can go to online lenders in this space who have higher rates including Kabbage, BlueVine and StreetShares. Kabbage currently leads the way as an online lender with well over $1B in loans originated.
Loan Amount – up to 100% of equipment value
Loan Term – 12 – 72 months
Interest Rates – 8 – 45%
Equipment financing is used by businesses to buy a piece of equipment or device to help them produce more goods and increase revenue. This type of financing can be one of the easiest to secure, though this is not always the case, as the equipment acts as collateral for the lender in case the business in unable to pay back the loan. Lenders tend to not extend repayment terms for fear of equipment becoming out of date and borrowers should be careful to borrow for equipment that can last. Loans can be expensive depending on the company’s credit profile, though most companies see this type of funding as worth the cost because of the increased production that accompanies the new equipment.
Business Credit Cards
Card Limits – dependent on credit profile
Interest Rates – 8 – 25%
Business credit cards are a form of financing every small business needs; companies use cards for purchases, travel, equipment and to help pay invoices. Rates on cards will vary based on the personal credit profile of the business owner and are offered by the main card companies like AMEX, Chase, Capital One and Bank of America. This form of financing is something that many business owners rely on and tends to be the most popular form of financing for companies who are just starting to gain traction.
In conclusion you can see that small businesses have plenty of options to choose from when looking to finance their company. When looking to outside sources of capital, businesses should consider why they need the funding, how long they need funding for and when they need the funding. Understanding your business, in particular how sales are generated and the cycle of your revenue stream will help you determine the best option to use.
We would like to extend a thank you to Fundera and Lendio, two invaluable resources when writing a post like this, as they are two of the industry leaders in online small business lending.