The ice-age of bank small business lending continues. The Federal Reserve Bank of New York’s recent survey found that while 58% of small businesses want credit, only 16% received the amount they wanted. Finding financing can be a challenge, but there’s good news. You have many options!

Here are 10 suggestions for finding the right financing for your business.

Banks and Credit Unions: Banks and credit unions generally offer the lowest rates, with typical annualized cost of 5-15%.  The process typically requires significant documentation and can take several weeks before finding out whether your application has been approved. The website reports that four out of five applicants to large banks are rejected. To be a strong candidate, you should have real estate or cash collateral and strong personal and business credit. Working with the Small Business Administration (SBA) can allow banks to relax some requirements, but generally requires an even longer process.

  • Pros: Low rates. Many types of credit offered, including loans and lines of credit. Large amounts (over $1 million) available to highly-qualified businesses.
  • Cons: Most applicants are declined. The process can be long, difficult, and uncertain. Generally requires strong credit, collateral, and additional capital investment from the business owner.

Marketplace Lending

Companies like Lending Club replace the complexity of traditional lending with a faster, simpler way to borrow. These marketplaces bring together borrowers and investors by enabling people and institutions to invest in each loan.  They offer a loan process that is typically faster and easier than a bank’s, with much lower rates than online short-term lenders. Lending Club provides loan offers instantly and funding generally within a week, at an annualized cost of 8-36%.

  • Pros: Fast, easy online process. Fair, transparent rates. 1-5 year terms mean lower monthly payments than a short-term loan. No collateral required.
  • Cons: No branches, so no face-to-face relationship.

Nonprofit Microloans

Non-profit micro-lenders typically offer smaller loans of under $50,000, with an annualized cost generally 10-29%.  Most micro-lenders have limited service areas, and often focus on specific populations, such as low-income entrepreneurs.

  • Pros: Generally low rates. Specialized programs may help approval. Advice and coaching often available.
  • Cons: Limited availability, smaller loan sizes. Process can be long and difficult.

Business Credit Cards

Business credit cards offer flexibility, annualized costs of 11-23%, and they’re easy to obtain for those with strong personal credit.  But if you need more than $20,000, you likely need to look elsewhere.

  • Pros: Easy application, flexible repayment.
  • Cons: Small amounts of capital only. Generally requires strong personal credit.

Equipment Leasing

If you’re looking to acquire equipment, leasing companies may be an option.  Because the transaction is not a loan, an interest rate is often not disclosed.  When calculated, annualized cost can be 6-36%, or higher.

  • Pros: May be available to start-ups. Possible tax benefits.
  • Cons: Often expensive, often not transparent about cost, limited to equipment finance only, you do not own the equipment.

Online Short-Term Lenders

These lenders offer a fast process, but at a relatively high cost.  Annualized cost can average over 50% and be as high as 130%, but the cost is not always disclosed this way. If you want to be able to compare the cost with other sources, be sure to ask for the annualized interest rate – not simply the “factor rate” or dollar cost of the loan.

  • Pros: Fast, easy process. Available to those with weaker finances and credit. 
  • Cons: High rates. Often not transparent about cost. Total repayment amount is fixed – prepayment will not save cost. Short-term loans require fast repayment, tying up cash flow.

Merchant Cash Advance

Small businesses needing short-term capital can consider a merchant cash advance. In return for upfront cash, you agree to repay a percentage of future sales, typically taken directly from your credit card swipes.  Cash advances are notoriously costly, often with an annualized cost of 40-120% or higher. 

  • Pros: Available to business with weaker finances and credit.  Payment amount rises and falls with your sales.
  • Cons: Very high cost, pricing not often transparent. Total repayment amount is fixed –

pre-payment will not save cost. Short-term requires fast repayment, tying up cash flow.

There are other forms of financing available to businesses, including

  • Equity financing

This involves selling shares in your business in return for capital. You don’t need to make regular loan payments, but think carefully before selling a portion of your business.

  • Crowdfunding

On websites like IndieGoGo, small business owners can raise donations from friends, family, customers, and other supporters. The main advantage is these are donations, not loans, but most campaigns fail to reach their fund-raising goal.

  • Friends and family

People you’re close to can help provide debt, equity, or even gifts, but you may not be invited to Thanksgiving next year if things don’t go as planned. (It’s happened before!)


About the Author(s)

Sid Jajodia leads small business lending at Lending Club, as VP, Small Business, and previously was head of small business lending at Capital One Bank. Lending Club is America’s leading credit marketplace, transforming banking to make it more cost-efficient, transparent and customer-friendly.Lending Club is a National Sponsor of SCORE.

Sid Jajodia, Lending Club

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