If you’ve been running your business for some time now, then you probably know how important it is to have enough capital on hand to finance business expenses. Whether you’re running a construction business, medical practice, or salon, chances are, you’ll need the additional capital boost at some point.
Business owners often turn to small business lenders for help. But finding the right one that offers the best terms based on your business’s current situation and needs can be challenging. Taking on debt is a big business decision, and as such, it makes sense why you should work with reputable lenders.
If you’re thinking of applying for a small business loan for your company, we’ve gone ahead and researched what you need to know about small business loan companies and how you can find the right lender for your business.
What are the Different Types of Lenders?
Businesses have a variety of choices when it comes to where they can borrow additional capital. The most common avenues for business loans are usually commercial/traditional lenders, the Small Business Administration, and alternative lenders.
While they all provide funding for small businesses, each handles business loan applications differently. Here’s how each type of lender works:
1. Commercial Banks
Banks typically offer the best terms when it comes to small business financing. They offer lower interest rates, longer repayment periods, and sometimes, high loan amounts. However, their loan products can be among the most difficult to qualify for.
Banks, being risk-averse, only reserves their loan products to the most creditworthy customers. In other words, to qualify for financing from a bank, the business must have a good credit score and strong business financials. Most commercial banks may require a credit score of at least 650 or better, annual revenue of $250,000 and higher, and the business must have at least two years of business history.
If you qualify for a small business loan from the bank, you shouldn’t pass up the opportunity and immediately move forward with your application. However, it’s also worth noting that banks are notorious for their lengthy application process. So if you need quick access to capital, banks might not be the best lender for you.
2. Credit Unions
Credit unions are non-profit financing institutions owned by their members. It’s one of the best alternatives if you can’t qualify for financing from traditional lenders. They also offer great financing terms to clients with excellent credit backgrounds and solid business financials.
One downside of credit unions is that you need to be a union member to qualify for their business financing products. To become a member, you must apply for the institution’s field of membership. That means you need to have some ties with other members of the organization. It could be community-based, organizations, or occupation-based. Other than that, you have to pay a small membership fee and be able to use your accounts often to take advantage of the benefits the union offers.
Business owners typically don’t apply for a business loan from credit unions because they have fewer ATMs than banks, making it less accessible for businesses that need constant access to their accounts. The majority of them also do not offer online banking, which would require the borrowers to physically go to the credit union’s branch to make payments or withdraw money. This could be a hassle for business owners with busy schedules.
3. Alternative Lenders
Finally, when banks and credit unions aren’t an option, you can turn to alternative lenders for help. Unlike banks and credit unions, alternative lenders are much more flexible when it comes to choosing who they lend to. Many of them may be willing to work with high-risk businesses such as startups or those with low credit scores and poor financial history.
Some alternative lenders allow business owners to submit their applications online. They only have to fill in the application form and attach the needed financial documents into the lender’s database. From there, the lenders can assess the business’ eligibility and decide whether they will approve their application or not. If approved, businesses can expect the funds to reach their accounts within 24 hours or a few days.
In exchange for the convenience and the risk of working with subprime borrowers, alternative lenders tend to charge higher interest rates than banks and credit unions. The higher interest rate assures them that they won’t lose much of their capital if the business becomes unable to pay off the loan balance down the line.
Tips on Finding the Best Small Business Loan Company
Small businesses, regardless of their industry, often have a hard time finding the right business lender. As an entrepreneur, you want to work with a credible, reliable lender to help you with your current business needs.
In the process of finding the right lender for your business, use these four tips to streamline your search:
1. Identify your needs
One of the first things you need to do when searching for the best business loan company is to identify your needs. There are virtually a lot of small business loan products available for SMEs out there – with each tailored to address a specific need.
For instance, if you need a large amount to cover business expansion and construction costs, an SBA 504 loan or long-term business loan might be for you. Or maybe you need a credit line you can access anytime to cover unforeseen business expenses. In that case, a business line of credit would be a viable choice.
Lenders do not offer the same loan products. By knowing what type of loan you need, you can narrow down the lenders to choose from, effectively making your search simpler and more manageable.
2. Check the lender’s credibility
By now, you probably have a list of lenders to consider. Before moving forward with your application, take the time to look into the lender first.
If you have a lender in mind, it would be a good idea to check their Better Business Bureau (BBB) rating before submitting an application. Better Business Bureau is a company that offers ratings on various companies, including financial institutions. A BBB rating of ‘A’ means that the company is highly reputable and credible. Anything lower than that should be dealt with caution. Also, check for industry awards and recognitions. The more they have, the more likely they are to be reputable.
You can also check the lender’s credibility based on the reviews they get online. If they have a website or an active social media account, check the reviews from their customers. If you see more complaints than positive comments, it might be better to move on to the next lender on your list.
When possible, speak with your friends or networks who may have used the same financing institutions for their business. Ask them about their experience and whether or not they would recommend moving forward with the application or not.
3. Compare lenders
As mentioned, you can apply for financing from different lenders. Banks, credit unions, and alternative lenders are the best avenues for business financing. But it’s important to note that they offer different rates and terms based on your current business situation. They may also have different eligibility criteria and application processes.
With bank and credit union business loans, you may be able to get a lower interest rate on the financing. Business loans from banks and credit unions can have an APR ranging from 2.5% to 7.16%. It is much lower than the APRs of loans obtained from alternative lenders, which can go up to 30%.
While alternative lenders may offer an online application, banks and credit unions may not. With that, you’ll have to physically go to their branch to submit your application form and required documents. Banks may need extensive documentation to prove your credibility, while online lenders may only require you to present the most basic paperwork like bank statements and other financial records.
With that, if you prefer convenience over a low interest rate, going with alternative lenders might be for you. However, if you’re looking for affordable financing and you have good credit background, a bank loan might be worth a shot.
4. Check if they have an excellent customer service
Finally, don’t work with a lender that is rude and unaccommodating. Ideally, the lender should make themselves available for their clients and answer their questions as professionally as they can. They should also be accessible through various channels, including phone, email, or live chat.
The last thing you want as a borrower is to get charged with fees without any explanation from the lenders. Business financing can be stressful as a whole, but if the company offers excellent customer service, the process will instantly become more bearable.
Final Thoughts on Finding the Right Lender for Your Business
Sifting through thousands of lenders can be one of the most overwhelming processes you’ll go through as a business owner. But with the right amount of research, you’ll be able to narrow down your options, and it will be easier for you to find the right lender that offers the best terms based on your business's current situation and needs.
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