After the 2008/2009 Great Credit Crunch, bank business loans have been increasingly hard to obtain. We have heard from business owners over and over again that it can be frustrating to get a business loan from a bank even if they have an established, profitable business. Basically, banks will only loan you the money when they know you don’t really need it. They also typically demand strong collateral for such loans. Fortunately, banks are not the only choice these days for established businesses to get financing. The new wave of alternative lenders have made business loans more accessible and efficient. But there’s a catch. These loans are more expensive than a bank loan, which can have interest rates as low as 4-5%.
Alternative Lenders for Established Businesses
In 2009/2010, there were very few borrowing choices for established businesses. If you got declined by a bank, your next best option was a short-term working capital loan or a merchant cash advance, which typically offers a 3-12 month term with 40-200% APR. We are talking about established businesses here: businesses who have been operating for 2+ years, who have $500K+ annual revenue and who are profitable/cash flow positive. It was a difficult time to expand your business if you didn’t have cash at hand.
Fortunately, in the past couple of years, there are a handful of new lenders who emerged to fill up the gap between banks and short-term lenders. Online term loan lenders such as FundingCircle, LendingClub, Dealstruck and Fundation offer 1 – 4 year unsecured term loans with interest rates from 6-25% and blended APR of 7-35% for business owners. The loan amount ranges from $20,000 – $500,000, which is sufficient for most businesses we surveyed.
Most of these lenders have built good technology to streamline the loan applications. Typically they don’t require you to submit a business plan, and some of them don’t even ask for financial projections because they would rather do the projections themselves through the tax returns, bank statements and merchant statements you submit. In other words, the application process is typically less effort than a bank loan and it usually takes a lot less time to obtain the loan. We are talking about weeks vs. months here.
Overall, I think the online term loans are a great funding choice. If you think you will get a bank loan eventually, the online term loans can also be used as bridge financing (they don’t charge pre-payment penalty) while you wait for your bank loan to be approved and distributed.
Where do I get credit lines?
The #1 financing product businesses ask for is a revolving credit line. Unfortunately, not many affordable options are available if you don’t count business credit cards. Banks don’t like to offer large lines because it’s hard to underwrite. (Pulling a line from a customer is also super painful and relationship straining).
You can get a 1-year term loan from lenders mentioned above as a proxy of credit lines and establish a relationship with them. Typically, they will offer a lower origination fee for repeat customers.
It’s worth noting that Dealstruck and P2Bi offer receivable-backed credit lines. You will be approved a revolving credit line with a set interest rate (typically 10-20%). You can draw ~85% of your outstanding current receivable balance. These are pretty good options after you use up the credit from your low APR business credit cards.
More about banks
If your business is well established, I think it’s still worth talking to a bank because a banks’ rate is the cheapest. There are also banks who specialize in SBA loans that will be willing to take a bit more risk with real small businesses. You can use SmartBiz to apply an SBA loan online or check out our SBA Lender Search Tool to identify who are the top SBA lenders in your community.
Conclusion
The lending environment has become increasing favorable for established businesses. Banks are still slow but online term loan lenders and SBA loan packagers have made getting a business loan more and more efficient in the past couple of years. If you are looking for expansion capital, make sure you look beyond banks. You might find a better solution from alternative lenders.
This article was originally written on March 9, 2015 and updated on November 1, 2016.
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