Unless money grows on trees, most small business owners require financing to get their venture off the ground. It’s important to understand your financial needs and goals before seeking a loan or line of credit.
Qualifying requirements, rates and terms vary by lender and loan type. Here are some options to consider:
Alternative Lending Options
Many options, like a small business lender, are available if you’re looking for financing options beyond what conventional financial institutions offer. The best choice depends on the needs of your business, but alternative lenders tend to be more flexible than banks and can provide funding with a shorter application turnaround.
Generally, alternative lending—or fintech—involves loans or lines of credit provided by nonbank lenders. These lenders operate primarily online and use technology-first underwriting practices to streamline the loan application process. Alternative lender models can be beneficial when traditional lending sources don’t have the funding to support your business, or you cannot meet their strict qualification requirements.
Other benefits of alternative lending include a simpler application process, less documentation and a faster turnaround in both approval and funding delivery. These are important factors when securing business financing, but remember that you’ll likely pay higher interest rates with these options.
Term loans provide small business owners with lump sums of cash upfront in exchange for specific borrowing terms. Borrowers agree to repay a certain amount at a fixed or floating interest rate over a set repayment schedule. Because of their predictable payment structures, term loans are one of the most stable forms of business financing. When underwriting this type of loan, lenders typically consider a borrower’s credit history and annual revenues.
However, not all businesses have the credit histories or collateral required to qualify for this type of financing. This can frustrate business owners who require a quick capital injection to meet immediate funding needs. In these cases, it may be best to consider alternative lending options with more lenient requirements.
Lines of Credit
A line of credit is similar to a business credit card in that you have a predetermined amount of funds to borrow and repay later. Many lenders also have policies to help you avoid overspending on this type of financing.
Businesses often use a line of credit to cover short-term expenses like increasing inventory or salary payments. In addition, a line of credit can help small business owners control their cash flow during cyclical times when they face increased spending or delayed invoice payments.
Some lines of credit are secured, requiring you to pledge assets to the lender. This reduces the risk for a lender and may improve your chances of loan approval. However, unsecured lines of credit are popular for small business owners as they typically have lower interest rates than traditional loans.
Merchant Cash Advance
You don’t need to qualify with merchant cash advances based on personal or business credit. Instead, you can get approved by showing that your business can generate consistent credit card and non-invoice sales to repay the advance and fees.
You can use this type of financing to grow your business. For instance, if you want to expand your manufacturing space to begin production on new products, you can secure an MCA to cover the expansion cost and boost revenue.
Like other business funding, you pay interest for merchant cash advances. But unlike traditional loans, these payments are based on a factor rate that multiplies your total advance amount and adds on fees. This repayment structure can help you avoid getting stuck in a cycle of debt, but it can also be difficult to compare the costs with other financing options. Fortunately, lenders can provide information about their factor rates and fees online. This way, you can compare the prices before deciding on this type of financing.