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.
- Online banks have been increasing in numbers. If you can’t meet the eligibility requirements of traditional banks, online lenders might be able to supply the credit you need. Make sure you are contacting the appropriate type of loan source. Peer-to-peer lenders and credit unions typically lend to established small businesses with at least a one- or two-year track record.
- Online lenders offer a variety of different loan packages. Some companies require a specific dollar volume of business and/or that you have a certain number of full-time employees. As a rule of thumb, the newer your venture is, the fewer requirements, and/or the greater the risk, the higher the interest rate charged. Online lenders can make the loan process less exacting, much easier, and give you your money faster – but in turn, you will pay higher interest rates.
- Check the reputation of online lenders. Because this is a relatively new business arena, check the various companies’ BBB accreditations and customer reviews. Try to find a lender that has been in business for a few years.
- Look carefully at the information each lender has published. Look at interest rates, terms and the eligibility requirements of various potential sources. Also pay attention to the quality of communication the lender uses to present its business and loan procedures. You’ll want to find one with a good website that is both easy to use and informative. Reputable lenders usually provide extensive FAQs, and make it relatively easy for you to calculate the total cost of a loan – including interest rates, fees and any financial penalties.
- Get organized. Have a written business plan, a strong business pitch and copies of relevant financial information (bank statements, tax returns, Profit/Loss (P&L) statements, etc.).
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.