A new generation of innovative capital providers has ushered in a Golden Age of financing for small businesses. Today's entrepreneurs can select a finance provider, choose an application process that meets their needs, and specify a repayment schedule.
This is a welcome development for time-strapped entrepreneurs, particularly those who run demanding businesses such as restaurants, medical offices, beauty shops, nail salons, and spas. Online finance providers in particular are helping to meet their need for smart, fast capital.
But it can also be challenging to sort out the choices, from traditional options such as banks or Small Business Administration loans, to alternatives such as online installment loans or loans where repayment is based on daily sales performance.
If you are a business owner looking to access working capital to finance equipment, build inventory or any other reason, any of the following three capital options can help you meet your goals. Consider the pros and cons of each to help choose the best option for your small business.
Installment Loan
An installment loan is what many of us think of when we think of a loan. The borrower receives the capital in a lump sum and then pays it back over time, usually monthly, in equal payments at a fixed interest rate. Installment loans are typically available from a range of finance providers.
Alternative finance providers, however, have created next-generation installment loans that completely change the experience for small-business owners.
Now, loans can often be made in a matter of days, the application process is simple and fast, and less documentation is required. Further, many online lenders don't require personal collateral or an appraisal.
Many business owners like the fixed payments, which allow them to anticipate and manage their financial obligations. Like any other loan, however, interest rates, payment terms, fees and eligibility can vary widely so business owners need to be diligent in shopping for the best loan for their needs. Business owners should look for established capital providers with proven experience with businesses of their size and in their industry.
Sales-Performance Loans
Sales-performance loans -- sometimes called revenue-based financing -- offer flexible repayment based on cash flow. Borrowers pay a fixed percentage of each day's credit or debit card sales to the lender.
Many entrepreneurs like this type of loan because it helps them manage the inevitable ups and downs of running a small business. Some days, weeks or months will be busier than others and their loan repayment (and loan term) will reflect that variation. More is sent on busy days, less on slower days.
Online alternative finance companies have also revolutionized these types of loans. Since the loan is often repaid through an automated process using the business's credit card processor, the owner doesn't have to remember to write a check to stay current. When the loan is repaid, the payments stop automatically.
These cash-flow friendly loans are offered for amounts ranging from just a few thousand dollars to hundreds of thousands of dollars. In choosing a loan, it's important for business owners to consider their overall needs, goals and resources, and the associated terms and fees. These types of loans, for example, may carry higher interest rates than conventional loans. On the other hand, small businesses that don't qualify for traditional loans or have seasonal fluctuations may see this as an attractive option.
Small Business Administration Loans
These government-guaranteed loans can be attractive to small-business owners. They often have competitive interest rates, a longer repayment period and have more flexible lending standards than standard bank loans. They may not be suitable for every type of business, however.
According to the SBA, small business loans range from about $5,000, called a microloan, to $5 million, the largest guaranteed amount. The average SBA-backed loan is about $370,000. The large majority of small service businesses, such as hair and nail salons, won't require a loan nearly that large.
The application process can also be demanding and time-consuming. For example, potential borrowers must submit a personal and business credit history, personal and business financial statements, and a detailed business plan, among other documentation.
Recognizing that its application process can be demanding, the SBA is introducing new online tools to help borrowers and lenders.
While SBA loans make it possible for banks and other lenders to provide credit to more businesses, they may not be the most practical (or attainable) choice for many small businesses. The agency notes, for example, that "reasonable to strong collateral (personal and business assets) is very important" and it expects the loan be "fully secured."
Capitalizing on the Golden Age of Financing
In the past, banks were the first stop for many small-business owners. Now, eight years after the financial crisis, banks are still cautious about small-business lending and are focused on loans in the six-figure range, which is more than many small businesses need.
Further, while traditional bank loans can offer attractive interest rates, the process can be slow and complicated. According to research from the Federal Reserve, small-business borrowers can spend nearly 25 hours on loan paperwork, and successful applicants wait weeks or months for the funds to actually be approved and available.
Every business owner knows his or her business best and the choice of loan is based ultimately on the specifics of the business, including the long-term plan, projected growth trajectory and available resources. A diverse and growing field of alternative and traditional capital providers offers more choices and more customization than ever. With the Golden Age of financing, entrepreneurs have an unprecedented opportunity to find the right partner to meet their capital needs.
James Mendelsohn is Chief Marketing Officer at CAN Capital, Inc., the largest and most-experienced small business finance specialist providing access to capital.