Small business lending 101

For many small business owners, they’ve turned their passions for providing services or products into livelihoods. But unlike bigger corporations and companies, when small businesses need to cover payroll after a down month or two, or want to expand their current business offerings, getting ahold of working capital can be tough to come by. That’s why small business lending is a popular option that most small businesses need when scaling what they’re currently doing — and getting access to that working capital is easier to come by than most people think, especially when you leverage both traditional and alternative lenders.

Small business lending — choosing the right kind of lender

While most small business owners are aware of loans and business credit cards, did you know that there are more lenders available than just banks or credit unions? That’s why we’ve put together a comprehensive overview of both traditional and alternative lenders to understand what kinds of small business lending options there are for you and your small business:

  • Traditional lenders: most traditional lenders, like banks and credit unions, offer a few different funding options (i.e. term loans, business credit cards, lines of credit) with reasonable interest rates and with high reputations from years of doing business with other bigger companies in the area. However, traditional lenders have strict eligibility criteria, lengthy application processes, and may offer lesser loan amounts based on what kind of collateral you can put up front. And most banks aren’t looking for repeat expenditures, like loans to help cover payroll or hiring expenses.
  • Alternative lenders: alternative lenders are here to provide small businesses with an opportunity to secure working capital in more ways than thought possible. Typically, their application processes are quicker, easier, and offer more flexible payment and term options with a variety of financing products available. But some of the small business lending products can be more expensive, come with shorter terms, and may require daily or weekly payments.

Knowing what small business lending you should find is half the battle

For most small business owners, understanding what route they want to take when considering a small business loan, line of credit, business credit card or more can be half the battle. And understanding that there are more options available to you if you have bad credit, or don’t meet the collateral needs of traditional lenders, can help you and your small business if you’re looking for small business lending.

When looking into financing products, you should always determine what kind of lending you’re looking for. Whether it’s something that you can pay off in a month, or working capital that you want to finance on a need-be basis, creating a holistic view of your business goals can help when determining what kind of small business lending you want to go with. And also developing how much you and your small business can afford to pay back will put you two steps ahead when it comes to financing your small business needs.

Types of small business lending products

While most small business owners are aware of term loans or credit cards, there are various financing products available based on your small business’ needs, such as:

  • SBA loan: The Small Business Administration is a government-funded entity that provides government-backed loans through partners who can distribute funds when capital is needed. These loans have stringent policies on who qualifies, and typically are used in times of economic distress across the entire market.
  • Bank loan: a bank loan is a traditional form of lending deposits a one-time sum of cash into your business bank account and offers varying repayment and interest fees based on your business qualifications. Although this is a preferred method for most small business owners, banks typically require high revenue and excellent credit in order to qualify.
  • Term Loan: A term loan allows you the ability to secure working capital and then pay it off in set payment amounts and dates for added flexibility. Typically, a term loan has lower rates than other financing options, but it may require more upfront verification like collateral and a positive profit trend to be able to qualify.
  • Line of credit: A line of credit is a flexible funding option that allows small business owners to access capital on a need-be basis. Your small business is approved for a set amount of credit and then allows you to draw on the approved amount when needed. This option allows you to take out capital when it’s necessary, without having the need to take it all out at once.
  • Asset-based loan: An asset-based loan allows small business to access working capital through a loan secured by assets that the business has. This allows the lender to collateralize with asset(s) from a business borrower, leading to potentially lower rates. Here, the more liquid the business asset is, typically the less risky the loan may be considered for better term options.

Applying for small business lending

Looking to apply for small business lending? We’ve broken down the process for both alternative and traditional lenders to help you understand the key differences in the application process:

For an alternative lender, you’ll need to follow the below:

  • Determine how much financing you need and how much you can afford.
  • Review your business qualifications like your credit score, time in business and revenue
  • Accumulate all the documents and requirements that are needed to apply (bank statements, photo ID, voided bank check, business license, tax returns, and any legal documentation), and then proceed to submit your application online. However, you may need to speak with a business advisor in order to figure out the best route for you and your business to take.
  • Once you’ve received approval, you’ll need to discuss with a business advisor what options would work best for your business. If you know your repayment options and how much you can afford, you’ll be able to best determine which route of financing to take.
  • And lastly, you’ll need to discuss a timeline for receiving your funds. This can be quicker for most alternative lenders through lending options like short term loans, or can take a longer period when dealing with bank loans or SBA loans.

For direct lenders, you’ll follow a more traditional route which includes:

  • Accumulating your bank statements with positive revenue history.
  • Stringent credit checks that look for satisfactory or better credit.
  • A collateral evaluation to determine how much your current assets are worth
  • Applying directly through them — meeting with underwriters and tellers in order to submit your application.
  • And finally, determining what kind of funding you’ll receive like a business credit card, line of credit, or term loan.

Small business lending for today’s small business owner

Whether you’re looking to scale your business or simply trying to cover payroll, small business lending gives you the flexibility to come up with working capital through a variety of options that are available to you and other small business owners. But knowing which route to take when looking for small business lenders can help guide you to the right service or product that fits you and your small business’ needs.

If you have any questions or would like to speak with a business advisor, call one of your small business experts at Rapid Finance today: (877)-252-0827.