The world of small business funding is much more complicated and varied than it was prior to the financial crises of the late 2000s.
In the aftermath of the Great Recession, many banks stopped lending to small businesses and startups. When these banks left the scene, many other non-traditional lending firms entered the picture. Now, with the economy regaining its legs, the traditional banks have come back to the fore with small business lending.
All of this leaves business owners and entrepreneurs faced with a daunting task of making sense of the wide array of financing options available. Try searching for “small business financing” in Google or Yahoo to get a taste of what they’re up against.
Because there are so many options, it’s important for borrowers to examine each option and, at a minimum, understand the terms of the loan as well as the expenses and fees.
Here are three popular routes that entrepreneurs use to kickstart their dream of owning a retail shop, a restaurant or even a franchise business:
It would be great to explore an SBA loan first since they have lots of advantages. Unfortunately, the rules state that borrowers can only get this type of loan after they have exhausted their other options. In the end, banks still issue the loan but the difference is that the promise to repay is backed by the U.S. Small Business Administration. Because of that, banks are more willing to offer these loans to borrowers they may have otherwise turned down.
Traditional Bank Financing
Getting a loan from a traditional bank can take two or three months to receive approval and their lending standards are typically higher than other sources but, in the end, they are often the least expensive option for borrowing.
Because of the lengthy application process, the traditional banks are best for entrepreneurs who can afford to wait and who have a healthy financial background. The banks will want to know about your business and personal credit history as well as your ability to provide collateral. If you already have a relationship with the bank, that may help your chances of getting approved if they can see that you’ve been a good customer for some number of years.
As we mentioned earlier, the Great Recession spawned a number of non-bank lenders, including several online lenders who offer loans in as little as 24 hours.
In general, it’s easier to qualify for these loans and the application process is much faster but borrowers will likely pay more in fees and interest. Because of those two factors, it’s best to vet these loans as much as is possible before signing up.
To do that, always look for the annual percentage rate for the loan, not just the ‘factor rate’ that some lenders advertise. That’s important because you’ll want to be able to compare apples-to-apples when analyzing your costs.
What do all of these options mean for borrowers? It may seems daunting but it’s also nice to have so many options. Be sure to get your financial records in order, shop around for rates and then settle on the loan that best fits your situation.
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