It’s true, there are more options available today than ever before for business owners looking for a small business loan, but there isn’t really a one-size-fits-all solution. Understanding the relationship between why you need the loan, or your loan purpose, and where you should be looking will help you find the right loan.
Should your first stop be the bank?
Most business owners naturally think the first place they should visit is their local bank. They likely have a business checking account and do other business banking there so it makes sense, right?
Yes, there are times when the bank might be the perfect place to start your search—provided your loan purpose makes sense for the type of financing they offer and your business meets the credit criteria the bank is looking for. Unfortunately, there are fewer banks lending to small business owners today; and unless your business is looking for the right type of loan and your business matches the right credit profile, it’s now much harder to find a loan at the bank than it once was.
“It is difficult for qualified borrowers to find willing lenders, and vice versa,” writes Karen Mills, former SBA Administrator, when describing what it takes to get a loan at the bank. “… Successful applicants wait weeks or, in some cases, a month or more for the funds to actually be approved and made available. Some banks are even refusing to lend to businesses within particular industries (for example, restaurants) or below revenue thresholds of $2 million.”
How does loan purpose make a difference?
In the same way technology companies like Expedia, Airbnb, and Kayak are changing the way we plan a vacation, companies like Zillow are changing the way we buy a house, companies like Uber are changing the way we hail a cab, and companies like Amazon are changing the way we buy just about everything, technology companies are changing the way many business owners get a small business loan. One of the ways they’re doing this is by focusing on specific loan types, loan terms, and other criteria that match particular business use-cases.
For example, the type of loan a business would need to cover a short-term cash flow bump would be very different from a loan designed to finance the construction of a new warehouse or buy a piece of heavy equipment. Just as it might not make financial sense to purchase an automobile with a 30-year loan, there similarly are some business financing needs that just don’t make sense for a five- or 10-year term loan.
For example, a long-term loan might not be the best choice to purchase inventory that will likely turn in a few months or fill a short-term cash flow need — the total amount of interest would be far too costly to meet the short-term use-case, even if it came with a lower annualized interest rate. On the other hand, purchasing equipment or real estate that can be depreciated over several years would likely be a great fit for a longer-term loan.
In addition to considering the term of the loan—short-term loan vs. long-term loan, there are also lenders who specialize in financing special business needs like equipment, real estate, or even the purchase of a franchise. When loan purpose drives your search for financing, it makes it easier to find the right lender, provided your business otherwise meets their credit criteria.
In addition to specializing in specific loan types, technology is streamlining the application process and leveraging data to make loan decisions faster and based upon more than just a personal credit score. If you own a small business and need capital, there have never been more options available. What’s more technology is making it easier to apply, quicker to get approved, and putting capital into your hands faster than ever before.