While the local bank remains a traditional source of financing for small businesses, it is not the only option. Rates, terms and qualifications vary by lender and loan product.
There are also alternative lenders ranging from community, mission-driven organizations to invoice financing companies that offer more accessible funding. Learn about these different options in this article.
If you need an injection of capital to help your business grow, pursue new opportunities, or weather a cash flow crunch, pursuing outside financing can be a smart move. But choosing the wrong type of financing or agreeing to unfavorable terms can damage your business’s financial health.
Term loans are available from many sources, including traditional banks, credit unions and Community Development Financial Institutions (CDFIs). Your lender will set your loan terms, which may include a fixed or variable interest rate. Some lenders require a down payment, which can reduce your loan amount and overall cost. You may also be required to justify what you plan to buy with the loan funds and demonstrate your ability to repay the funds on time. Typically, loan terms range from three to 10 years.
Lines of Credit
Unlike the lump-sum disbursement of a small business loan, lines of credit are revolving and allow borrowers to access funds on an as-needed basis. Interest rates are often lower than those charged by personal loans and credit cards, and borrowers only pay for what they use.
To qualify for a line of credit, you’ll likely need strong personal credit and consistent or growing business revenue. Lenders may require a draw period or repayment terms to mitigate their risk and may charge factor rates rather than interest rates for borrowers with poor credit. Despite these drawbacks, lines of credit are popular with many small businesses and can help keep bestsellers in stock, boost marketing, or overcome seasonal or other cyclical cash flow challenges. They are usually easier to obtain than bank loans.
Commercial Real Estate Loans
Commercial real estate loans can help you buy, build or remodel a building that’s a permanent fixture for your business. They work similarly to mortgages, with loan terms often up to 25 years and requiring an excellent borrower profile.
There are a few different types of commercial property loans, including traditional bank and credit union commercial mortgages as well as SBA 504 and private investment property loans. Other options include bridge loans and vendor financing.
Bridge loans are a short-term financing solution designed to “bridge” gaps until you can secure longer-term funding for your commercial real estate. These loans generally have much shorter terms than conventional mortgages and are more likely to be available from alternative lenders. They can be an option for a few different types of businesses, such as restaurants and retail shops.
Merchant Cash Advances
A merchant cash advance is a different form of financing that enables small businesses to access quick capital. This type of financing isn’t technically a business loan, but rather an upfront sum of money that a small business pays back using a percentage dedication of its debit and credit card sales.
MCAs are fast to fund and often can be approved in a matter of hours. They also don’t require a long business history and are often pitched to newer companies or those that have trouble qualifying for traditional business loans due to low credit scores.
However, MCAs can be costly for small businesses and aren’t federally regulated. It’s important to carefully consider the pros and cons of this type of financing. Use our MCA Calculator to compare costs with other business funding options.
If you need to buy expensive equipment like point-of-sale systems, earthmoving machinery or computers and software, an equipment loan could be the right choice. It offers a longer term, lower interest rate and less red tape than other types of business loans.
Lenders typically require profit and loss statements, balance sheets and cash flow analysis to assess your business’s financial strength before approving an equipment loan. They also may ask for your personal credit history.
The equipment you buy acts as collateral for the loan, and you will likely be required to sign a personal guarantee that holds you personally responsible for the loan in case of default. Because of this, a failure to make payments will impact both your business and your personal credit score.