[Editor’s note: This is a guest post from Priyanka Prakash. Priyanka is a finance writer at Fit Small Business, an educational site for small business owners with dozens of product and service recommendations and how-to articles. Prior to becoming a writer, Priyanka was a business attorney at Summon, a Y Combinator-backed ridesharing startup. She now focuses on writing finance articles for small business owners and others interested in small business finance.]
The options for a small business owner looking for a loan are greater than ever, but you can’t rely on taking the traditional path. Getting a bank loan is no longer a possibility for most small businesses, with over 80 % of small business owners getting denied. Fortunately, a multitude of other types of small business lenders have stepped into the void left by banks. But how do you know which is the right option?
This article takes you through 6 popular small business loan options, their pros and cons, and gives you some advice on how to narrow down your choices.
Pros and Cons of 6 Exciting Small Business Loan Options
1. SBA Loans with a Fast Turnaround
If you’re a small business owner with a strong credit score, one of the least expensive sources of funding is an SBA loan. Normally, applying for an SBA loan takes months. The SBA has tried to remedy this problem with programs such as the SBA Express Loan program, but it is private companies like SmartBiz who are really speeding up the proces. With SmartBiz, you can apply online and get funding within a few weeks.
- Saves you time. Instead of applying to multiple banks for an SBA loan, SmartBiz, if they approve you, will find a bank that’s willing to fund you.
- Inexpensive. SBA loan rates are currently in the 5-8 % range, making this one of the least expensive sources of small business funding.
- Long terms. SBA loans from SmartBiz have 10 year loans, so you can enjoy low monthly payments.
- Hard to qualify. In most cases, you need to have a credit score over 700, a profitable business, and some collateral to receive an SBA Loan.
2. Marketplace Lenders
Marketplace lenders match prospective borrowers with investors. Most appeal to a very specific kind of small business owner. Examples include Funding Circle, StreetShares, and Kickfurther. Funding Circle appeals to prime borrowers with established businesses and good credit. StreetShares also caters to prime borrowers, but their focus is helping veterans. Kickfurther is designed for small businesses that need capital to purchase inventory. There are other marketplace lenders for franchises, real estate businesses, and other kinds of small businesses.
- Speed: Marketplace lenders offer a fast, electronic application process. You can apply, and if approved, get funding all in about 1 week.
- Low Rates: Rates on marketplace loans start as low as 5 % for borrowers with good credit. If you have average credit, be prepared to pay as much 15-20 %.
- Loans may be unsecured: Marketplace lenders require a personal guarantee, and they may place a lien on your business assets. However, they don’t require specific collateral. An exception is Kickfurther, where the investors who fund your loan buy the inventory from you.
- Very specific requirements to qualify. Every marketplace loan has its own set of qualification requirements for credit score, revenue, and type of business. Make sure you do your research before selecting which ones you’d like to work with.
- Shorter terms. Marketplace loans typically terms of 1-5 years or even shorter (the average Kickfurther loan is 6 months long). This means they are not designed for big business investments, such as real estate.