Whether you are thinking of expanding your water garden or Koi business or starting new, getting a loan from a traditional bank might not be as easy as you think.
Although many small business owners first turn to the bank for a loan, bank lending to small businesses is on the decline. It is also tailored to larger busi- nesses seeking big loans, meaning that 30 to 100 days can pass between loan application and approval. In addition, the application process requires assembling a good deal of financial and tax paperwork, along with a thorough business plan and multiple fees. You will likely be required to provide collateral, something that many small business owners are unable to do.
Why can’t my bank, where I have a good relationship and solid history, approve a loan to grow my business? Simply put, the cost benefit just isn’t there.
While this decline of bank lending leaves many small business owners feeling frustrated about the chance of securing a loan, there is an upside. Necessity is the mother of invention and the decrease in banks lending to small businesses has paved the way for a variety of alternative lenders that have emerged to fill this “gap.”
So, where to turn for that cash? It depends on your situation.
You first need to understand the different alternative lending options that
are available. How do they work? How are they different from traditional bank loans — and from each other? What kind of documentation is required? Once you become educated on the options, compare them to your needs and select the one that works best for you.
**What are the Different Types of Loans?**
**Small Business Administration (SBA) Loans**
SBA loans are the next of kin to traditional bank loans. The SBA backs a bank loan and guarantees against default, allowing banks to take more risk. A common misconception about SBA loans is that they are issued by the government. While the SBA provides a variety of tools for small business owners, they do not actually lend money.
For small business owners who have been turned down by a traditional bank, applying for an SBA loan may be a natural next step. An SBA loan is the best option for low rates and larger loan amounts but may not be a good choice if timing is important. The process of securing an SBA loan is rarely described as easy, fun or fast. It is more commonly referred to as painful, long and exhausting.
**Alternative Lenders**
Alternative lenders typically fall into two groups: those that make true loans based on cash flow and those that make advances against future sales. The first group is subject to state and federal lending laws and the second one is not — cash advances aren’t loans as defined by law; they are buying your future credit card receivables at a reduced cost now.
Let’s take a closer look at alternative lenders and the differences between the two.
**Cash Flow Lenders:**
These lenders are established and generally staffed by well-respected members of the financial services community. They operate much like traditional banks but specialize in lending to small businesses and are much more flexible. For example, they may not require collateral to secure a loan and are able to consider non-traditional factors for loan approval. Most cash flow lenders use an automated application process to look at factors such as online sales, social media rankings or even how your business looks on the Google Maps street view. Because they rely on automated technology and sophisticated algorithms, the turnaround is fast and you can often get approval and cash in hand within days.
**Merchant Cash Advances:**
Merchant cash advances (MCAs) are actually not a loan in the true sense. An MCA will review your merchant processing statements and/or bank statements and provide you with a loan based on taking a percentage of your daily credit card transactions until the loan is paid in full. What you need to know is that an MCA can cost considerably more than a traditional bank loan. So with an MCA, you can get cash fast, but it will cost you. MCA loans are usually short-term and have target repayment period averages of six to eight months.
Now that you know the different types of lenders that are out there, there are a few things you’ll want to consider.
**Fixed or Variable Payments:** Make sure you understand specifically how your loan is to be repaid. MCAs typically have variable payments and sell the variable payment option as, “If your sales have a good day, then more is paid back to your advance. If sales have a slow day, less of your money is repaid.” This is great unless your business experiences a GREAT day, week or month. Fixed payment lenders typically allow slightly longer terms on average, therefore reducing your total repayment per month. And, the total cost of a loan from a cash flow lender is typically much lower than that of a merchant cash advance.
**Total Cost:** The first question from many small business owners is, “What is the interest rate?” That is the WRONG question. The right question is, “What is the total cost?” A 5% interest rate may sound great, but when you have an origination fee, loan guarantee fee, loan platform fee, servicing fee, underwriting fee and processing fee, a 30% rate deal may be a far better option. You have to compare the total cost and the repayment period offered. It is really the only way to understand and compare apples to apples. Our website (www.ioucentral. com) has a daily business loan calculator you can use to help compare options available.
**Type of Interest Rate:** Is the rate a simple interest or pre-computed? Simple interest loans let you save money by paying off the loan early, with real interest declining as the amount of the loan remaining is paid down. Pre-computed loans carry higher calculations and require payment of full interest regard- less of when the loan is paid off, and may even charge prepayment penalties. Even if you’re not planning on paying off the loan early, it’s good to have that option should your cash flow support it.
**Repayment:** Some loans call for you to make a lump-sum payment at the end of each month, while others call for automated “micropayments” in the form of daily remittances based on the daily cash flow of your business. The latter can assist you with budgeting and managing cash flow rather than ending your month with a major expense.
If you don’t want to “go it alone,” find a good business loan broker. They are typically signed up with many lenders, know their guidelines and can recommend the best product. Find a loan broker that doesn’t charge “add-on fees” over and above lender fees. Look for a broker who has been around and who sounds knowledgeable and fair. Some lenders allow a loan broker to sell a higher rate to earn a higher commission. Others, like IOU Central, do not allow increased rates. You will also get the same loan offer through a broker as you would coming directly to an alternative lender — so don’t be afraid to contact a business loan broker and discuss your options.
The Bottom Line? Don’t get frustrated if you are declined by a bank. Do your homework and select the type of loan that matches up best to your needs. Look for a lender that can turn around funds in the timeframe that you need, is easy to work with and offers a low cost to borrow and low payments to help foster your growth.
