There are a few different kinds of alternative lenders that provide small businesses with the funding for growth. Each has varying requirements and qualifications to get a loan. While traditional banks can be great funding resources, they will likely be the hardest to get financing from. They have strict underwriting processes and require a lot of financial documentation for a loan. You'll also have to put up collateral with loans from traditional banks. Wells Fargo is the only traditional lender we looked at with unsecured loans. In May 2018, big banks only approved roughly 25 percent of the small business loan applications they received, according to Biz2Credit.
In the same month, Biz2Credit found that alternative lenders approved around 56 percent of their applicants. Alternative lenders provide a wider range of loans and qualifications, like unsecure loans and short-term funding. Interest rates with these lenders will likely be higher than with traditional banks, but if your business can't meet the standards of a traditional lender, alternative lenders can be a great option. Oftentimes, they provide instant quotes and prequalified information online without a hard credit inquiry. This is a good way to see what kind of loan you would qualify for without committing to a loan.
In addition to traditional banks and alternative lenders, small businesses can get funding through the Small Business Administration. The SBA has a lending program that provides various types of loans for small businesses. These loans are financed by banks, like Chase or TD Bank, and the SBA incentivizes these institutions to lend to you by guaranteeing a certain percentage of the loan. As with traditional banks, getting an SBA loan may be a longer, more difficult process than going with an alternative lender, but overall, it's a great way to get funding from a reliable source.
Regardless of the lender, there are a few types of small business loans you should be aware of. Term loans are more traditional loans for small businesses. Revolving lines of credit generally have no defined terms and can be drawn on, paid off and drawn on again. Working capital loans are generally short-term loans to help manage cash flow. Invoice financing is a way to get an advance on outstanding invoices. Lenders will generally provide factoring services or provide a line of credit backed by your accounts receivable for a loan. Merchant cash advances are cash advances that are paid back with daily credit card sales; these loans are also ideal for quick funding needs. Equipment financing are loans tied specifically to vehicle, equipment and software purchases. Knowing about these types of loans and what your business needs can help you make the right decision when it comes time to partner with a company.