How to Find the Right Lender
Whether your small business is experiencing a funding shortfall or needs capital to expand, finding the right lender is going to be the first step towards meeting your business’s financial needs.
Does your business have at least three years of documented financial history? Most banks will not take on the risk of loaning to businesses younger than three years because they lack proven earning capacity. Here are a few financial options for owners of new businesses.
- Friends, family, and colleagues: Don’t underestimate the importance of good interpersonal relationships; a close friend who shares your vision can be essential for starting a new business
- Angel Investors: These successful entrepreneurs and philanthropists invest their personal finances with small businesses in hopes of taking part in a new success story.
- Venture Capitalists: Firms that profit by investing in new businesses with high growth potential are taking on big risks. To compensate, venture capitalists will expect to take part in management and decision-making. They will shy away from businesses like restaurants or local shops which are limited by their customer base.
Dealing with outside investors is an exercise in balancing personal relationships, decision-making power, and financial resources. Having a good plan is essential for navigating the obstacles of getting a business off the ground.
Most small business owners are looking for a commercial & industrial (C&I) loan product with standardized terms. Small business owners can inquire at local banks which offer personalized service, or larger national banks which may offer a wider variety of loans. Take a look at Entrepreneur’s ranking of the top 20 small business loan lenders in the nation.
There are two important distinctions to be made before you start shopping for a loan. The first is that loans can be either long-term or short-term. Long-term loans are generally used to finance expansions, like the purchase of new equipment and real estate. Short-term loans are more likely to be used to cover short-term obligations, like meeting payroll or paying vendors.
The second distinction is how the loan is secured. Secured loans (also known as collateralized loans) use some asset as insurance against the risk of default. Small businesses may put up everything from real estate to accounts receivables as collateral, depending on the loan type. Here are a few examples that you might run into while shopping around.
- Corporate Credit Card: Getting a small business credit card gives a small business great flexibility to make immediate payments.
- Credit Line: A line of credit may be extended to businesses with strong credit, allowing them to tap into a loan at any time. Credit lines allow businesses to borrow up to a preset amount when they are tight for cash and need to make emergency payments. The borrower only has to pay interest on the amount borrowed. The credit line can be renewed periodically.
- Merchant Cash Advance: The lender will loan a small business money up front, and then take a percentage of all credit card sales until the loan has been paid back. These loans are marketed as technically selling the lender part of your credit card sales, and tend towards exorbitant interest rates.
- Mortgage: Some small businesses will not be able to rent space or fit in the owner’s home. Small businesses take out mortgages to buy commercial real estate.
- Term Loan: This is the standard long-term loan with monthly principal and interest payments. It is used to finance fixed assets like manufacturing equipment.
Some small business owners successfully secure financing through other conduits.
- Credit Unions: Credit Unions are depository institutions set up to serve a particular community of clients. For example, there are credit unions dedicated to schools, military branches, and corporations. Some offer small business loans, and because they are not-for-profit, they often give better rates.
- Factor Financing: A business with slow-paying customers but immediate cash needs can sell its accounts receivables to a factor at a discount. This is not a loan because the factor assumes the risks of repayment, and the value of the accounts revolves around the account
- Small Business Administration (SBA): The SBA is a government entity dedicated to helping small businesses. While they do not offer direct loans, applicants can get loan guarantees from the SBA which allow them to borrow from banks. The SBA has a variety of loan programs and is a great source of information.