Any business owner looking for a small business loan would think of a bank right off the bat. After all, why wouldn’t you think of getting a conventional bank loan at low-interest rates? However, as most business owners in the United States come to know eventually, it isn’t always easy getting accepted for a loan by your local bank.
Banks have always set tough requirements for businesses to qualify for a loan including high credit scores and a substantial annual revenue. This is not uncalled for either since the financial crisis of 2008 ravaged the economy and the banking sector has had to tighten up their regulations regarding loans and mortgages.
This means the odds are against small or relatively new businesses that are looking to acquire small business loans from a bank. However, all hope is not lost just yet. As we shall discuss below, there are plenty of other loan options out there that might satisfy your business needs just as well, if not better, than a conventional bank loan.
Small Business Administrator (SBA) loans are given out by banks but are ensured by the SBA which is an arm of the government. It is a commonly held belief that SBA gives out loans itself but it only guarantees a large portion of the loan to the lender, which in most cases is the bank, so that they may be encouraged to give out more loans.
In case the borrower defaults, the lender would regain at least 75% to 85% of the original amount due to the SBA’s guarantee. This loan is suitable for businesses that narrowly miss out on conventional bank loans. There are three main types of SBA loans:
- SBA 7(a) Loan program: This is the most common type of SBA loan, which can provide capital up to $5 million for expansion of operations, purchasing equipment or as a safety net. It is considered more flexible than other SBA loans due to lower interest rates and repayment terms.
- CDC 504 Loan Program: This SBA loan program is specifically designed to purchase fixed assets such as land, buildings or equipment. The upper limit is the same as 7(a) loan which is $5 million however the interest rate differs depending on the amount of loan taken and the time period for which it is taken.
- Microloan Programs: These are available for startups or for businesses that require small amounts of loans. The upper limit for this loan is $50,000 and is charged at a higher interest rate due to the extended repayment terms of six years.
Usually, all SBA loans require a credit score of at least 600 with a minimum of 2 years time spent in the business. The annual revenue requirement varies from industry to industry, however, $100,000 is a safe figure.
If you fail to qualify for SBA loans or are looking for faster financing of your business then alternative loan options are the way to go. Alternative lending refers to all loan options that are available to consumers and business owners outside of a conventional bank loan and that provide disintermediation from financial institutes.
Alternative lenders, who can be accessed through online lending platforms such as Orumfy, provide these. Using such lending platforms eliminate the possibility of fraud and allows ease and transparency in the loan application process.
Let us take a look at some of the most popular alternative small business loans:
- Merchant Cash Advance: This loan is a good option for any business looking to get an immediate inflow of cash. MCA allows you to get a loan in exchange for ensuring the lender a certain percentage of your daily credit or debit card sales. Although this may be a quick way to get funding, yet it may hamper profits by directing a big chunk of earnings to the lender in peak season sales.
- Equipment Financing: In this type of loan, you set your asset as the collateral for the lender. Collateral is an asset that is pledged to the lender as long as the loan is being paid off if the borrower defaults then the lender keeps the collateral to cut his own losses. For equipment financing, higher the value of the collateral, higher will be the loan offered.
- Peer to Peer (P2P) Lending: This involves loan being given by business owners to business owners. Instead of going to a financial institute, a borrower asks for funds from peers who group together to finance his business with interest. As the borrower pays back the loan with interest, each investor gets his returns.
There are many other types of alternative loans that include but are not limited to bad credit loans, startup loans, and invoice financing.
Although alternative lenders provide loans much faster than banks, it is still important to note that the interest rate charged by them is also significantly higher than those by financial institutes. This may play an important role in helping you decide how to choose a small business loan since a high-interest rate will result in higher long-term expenses