When looking for a loan, you can always start with a quick Google search or perhaps respond to ad or mailer you find intriguing. But could you be limiting your options? With a variety of small business lenders, whether or not you start with the right one could make a difference in the end. Ending up with the wrong business lender could cost your business thousands if you’re not careful. But knowing all your lending options increases your chances of finding the lowest-cost loan for your company. If you read this article of the best business lenders by each product type, you’ll be heading in the right direction.
Who Helps More Small Businesses? Big Banks vs. Local Banks
For business owners interested in a bank loan, the first question is always “Which bank?”
The best place for you to start is the bank you currently have a relationship with. It helps that they get to know you, and with your accounts, so they have an idea of how you manage your cash.
If you currently don’t separate your personal and business bank accounts, it’s imperative you do. Not only is this a necessary business practice but it’s essential if you want to apply for a loan where you bank. They will want to have an idea of your business deposits and cash flow activities, and that’s hard to do if both your business and personal finances coexist.
Now, a greater debate when it comes to business lending at banks is whether a big bank or local bank is the way to go. If you have a relationship with Chase, a Bank of America, Wells Fargo, etc., there is no harm is having a conversation with your rep there and seeing what your chances are. But there is some information you do need to know. Small business loan approval rates are 3x the approval rates at big banks. So don’t worry if a larger bank tells you no, because there’s a chance your community bank might say yes.
Bank loans can have extensive applications, so make sure you have all your financial ducks in a row before you get started.
How SBA Loans Work
Although not a traditional bank loan, SBA loans are loans made by the bank. The difference is that a certain portion of the loan is guaranteed by the government, which is good for both the borrower and the lender. Why? This encourages more small business lenders to make loans to small businesses.
The term “SBA loan” is used generally, when in fact there isn’t one, singular SBA loan. There a few different loan programs offered by the SBA. You can always decide which one is best for you and start your loan search there.
The 7(a) Loan Program
If you go into a bank and tell the lender you want an SBA loan, chances are they’ll think you’re talking about the 7(a) loan.
This loan program is by far the most popular one offered by the SBA. This loan can be used for general working capital, and can go up to $5 million in loan amount.
There are certain guidelines and maximums the SBA sets with this loan type, and there can be additional fees involved with the product.
The Microloan Program
The SBA understands that sometimes you just need a small amount of capital when looking for a loan—and that’s why their micro-loan program exists. This is an amazing option if you’re looking for a loan between $3,000 and $50,000. You can apply for this loan at an SBA-approved intermediary but—fun fact—this is the one loan where the SBA is actually providing the funds.
The CDC/504 Loan Program
The CDC/504 loan program is perfect for businesses looking for larger loan sums, just like the 7(a), but is specifically designed for businesses looking to make a large purchase of a fixed asset.
With this loan type, you’ll be expected to pay a certain percent of total project cost from your own pocket.
Yes, You Can Get Affordable Loans With Online Business Lenders
After the recession, bank lending to small businesses dropped, leaving a lot of small businesses unsure of where to get the funds they needed grow. However, It wasn’t long before online business lenders started popping up, trying to account for the growing need for working capital.
Now there are more options than ever for business owners searching online for a loan. But the misconception is that these online small business lenders are only offering incredibly expensive loans—and that’s just not the case across the board.
Medium-Term for Small Business Lenders
When we say “medium-term” business lenders, we’re usually talking about online lenders that offer products that have terms longer than 1 year. More often than not, their loans also have monthly payments. Additionally, many of these lenders rates start at ~6%, which isn’t too many points higher than a bank product. That being said, qualifying for that low of a rate can be rough, so it’s important to take notes on the rates for a medium-term product can also creep into the teens.
In short, medium-term business lenders are offering a traditional term loan you are familiar with: a loan with terms that are over a year. It’s structured like a bank product, but the applications are faster and the rates are higher.