Following the Federal Reserve’s decision to approve a modest interest rate increase, banking insiders anticipate that larger banks will increase their lending to small businesses in 2016. Even before the Fed made its long-anticipated move, the percentage of loan applications approved by big banks already had increased to the highest level since the subprime mortgage debacle of 2008. Unfortunately, this post-recession high is only about 23 percent, which means that many small business owners continue to have trouble getting credit from brick-and-mortar banks.
For some small business owners, traditional banks remain the best option for borrowing at the lowest interest rates. However, securing credit can be time-consuming – and negotiating your way through banks’ approval procedures can be very challenging. You might be required to put as much as 30 percent down, and you should be prepared for a lot of paperwork and possibly a lengthy wait while your application is reviewed and checked. Not everyone can meet the loan criteria required by traditional banks.
Many business owners, for whom traditional banks are not a good fit, have used online funding sources successfully. These sources may be peer-to-peer lenders, who fund loans through individual investors. The Lending Club is the largest of this type in the United States. Other direct lenders provide funding with their own capital just like banks do. Interest rates from online and peer-to-peer lenders tend to be significantly higher than that of traditional banks (double digits rather than single digit rates from brick-and-mortar institutions). However, borrowers will find their review and approval processes less stringent, and will receive their loans faster than they would from traditional banking institutions.
Moreover, don’t overlook credit unions. They offer competitive interest rates (they are nonprofit organizations) and many business owners find them easier to work with than banks. To qualify, you will need to be a credit union member, but many have fairly simple membership requirements.
In determining which type of loan would suit you best, consider the following.
Securing a loan is easier than it has been for several years, but there are no shortcuts. Do your homework to identify the options that best fit your situation.