Getting a small business loan is a give-and-take, push-and-pull process. Every small business owner would love to have instant access to infinite, interest-free money with no limitation for usage. That is not how the industry works. Instead, as one aspect of a loan improves for the borrower, another must become more attractive to the lender. As interest rates drop, repayment terms extend. As minimum credit scores become more generous, personal guarantees become necessary.
One aspect of these loans is the speed with which a business receives its money. And as with nearly all parts of a small business loan, you can find loans with favorable underwriting speeds, but you’ll have to make up for that convenience in other ways. With that understanding in mind, here are 11 thoughts to keep in mind as you consider whether you need to seek out a fast business loan.
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1. Emergencies happen to every company.
Even if your small business financing is in great shape and you’ve got an appropriate amount of working capital, emergencies happen. Essential technology breaks, you have an unexpectedly weak month of sales, or you need to make hires. Things happen.
Every business should have a plan if a short-term emergency happens and you need to get a business loan quickly. You might consider having a written plan for any of the major emergencies: a slow month, utility disruption, and so on. How can you use some type of loan to cover your business needs when the going gets rough?
2. A pre-existing business line of credit can be a failsafe.
Business lines of credit are a form of revolving credit. Instead of applying for a loan and receiving the full loan amount as a lump sum in your company’s bank account, lines of credit are available for withdrawal as you need them. You’ll only make payments on whatever you borrow under the established limit. The same goes for interest – you’ll only owe interest on what you withdraw.
Lines of credit are available from a whole host of financial institutions: online lenders, credit unions, and traditional banks all offer them. And they’re very simple: many lines of credit even come with checkbooks and credit cards you can use to access the funds.
Lines of credit are particularly helpful if you can get one while your business credit is at its highest. That way, you’ll have access to a line of credit with highly favorable terms when the need arises.
So before you even consider whether you can get ahold of a fast business loan, consider whether you’d be better off taking out a line of credit while you don’t need any additional funding. That way, when those emergencies or opportunities pop up, you’re ready.
3. Who you borrow from is almost as important as the type of loan you’re looking for.
When speed is the name of the game, you should remember that the source of the loan is key. Many traditional big banks take a longer time to underwrite and then pay out their loans. Sometimes the process can stretch into weeks or months, depending on the type and size of the loans in question.
On the other hand, many alternative online lenders have built streamlined loan applications with more favorable qualifications. Some of these lenders, like OnDeck, even state that qualifying businesses will have access to their funds on the very same day they apply.
4. The SBA can help you out.
While the U.S. Small Business Administration’s 7(a) and 504 loan programs are some of the more rigorous and extended application processes out there, the SBA does provide an option for companies looking for a quick business loan.
Loans of up to $500,000 are available through the SBA Express program, which uses government dollars to guarantee up to half of the loan amount. You go through the application process with a third-party lender, and if you’re approved the SBA protects the lender from losing too much money in the case of default.
And the best part? Businesses applying for an SBA Express loan receive a decision within 36 hours. While this is admittedly not as fast a turnaround as other lenders, SBA loans are often the most affordable form of lending. Even these Express loans with their fast turnaround and limited guarantee are locked into keeping below the SBA’s maximum interest rate.
5. Short-term loans will probably be a good bet.
Taking on a company looking for fast funding is risky, and lenders don’t like risk. To compensate for the levels of risk involved with an expedited application process, many lenders make short-term loans available for these borrowers.
Short-term loans have some unique features. As their name implies, short-term loans are term loans with a brief repayment period, usually lasting less than a year and a half.
Because the repayment period is short, these loans often have fairly high interest rates. That way, lenders are still able to earn a sufficient amount of money to justify the risk of lending money to less qualified borrowers. And those loan amounts do tend to be smaller as well, again to protect lenders from risk.
6. Merchant cash advances can be helpful, particularly if you’ve got bad credit.
Merchant cash advances (MCAs) are not loans. Instead, they’re purchases. MCA providers buy a percentage of your company’s future debit and credit card transactions in exchange for a lump sum up front.
MCAs differ from other types of business loan options in a few other ways as well. Firstly, repayment can happen daily or weekly instead of the typical monthly payments you see in other options. At the end of each business day, your MCA provider takes an established percentage of your daily sales and puts it toward repayment of the advance.
On top of the unusual repayment structure, MCAs don’t involve interest rates. Instead, MCAs earn money by charging a factor rate. Factor rates are a number typically between 1 and 2. You multiply the size of the advance by the factor rate, and the product of those two numbers will be the total repayment amount. If you receive an MCA of $8,000 at a factor rate of 1.3, you’ll repay $10,400.
That daily repayment structure means you’ll pay more on days you’re busy and less on days you aren’t. It also means that you won’t have control over how quickly you pay back that advance, and there’s no benefit to early repayment. Those truths in tandem mean a quickly-repaid MCA can carry an effective APR in the triple digits.
But if you need cash quickly and your credit isn’t great, MCAs can be a good choice. MCA providers don’t care as much about your credit score as traditional lenders do. After all, your history of repaying debts isn’t as important to an MCA as your monthly revenue and record of debit card transactions.
7. If you’re looking to replace or repair equipment, try equipment loans.
In an equipment loan, the borrower puts up a down payment and has the remainder of the price of equipment financed. The lender holds the equipment as collateral, so if the borrower is for some reason unable to pay back the loan, the lender can repossess it, sell it, and limit financial risk.
Equipment loans are commonly used to buy expensive equipment, but they can also be used to repair, replace, or upgrade equipment. Many times, small business owners are looking for fast funding options because some essential piece of equipment has broken or fallen behind. If you run a specialized small business, there are pieces of equipment that are essential to producing any sort of income. If you run a pizzeria and your pizza oven breaks, you will not be open for business.
There are equipment loans available relatively quickly even from traditional lenders, too. Bank of America, for example, states that their equipment loans are funded within 10 business days. If you’re looking for a financing option to take care of a piece of equipment and are able to wait even a little bit, equipment loans could be helpful options.
8. Invoice factoring can be very fast for companies with lots of outstanding invoices.
Like merchant cash advances, invoice factoring is another very fast way to get flexible financing. And just like merchant cash advances, they’re not loans. In invoice factoring, a third-party company purchases your accounts receivable for a percentage of the invoice total.
For example, let’s say your company earns about $25,000 per month, and it’s all paid through invoicing. If you need to boost cash flow, an invoice financing company might come in and pay you 90% of the value of your outstanding invoices, or $22,500. They then take over the collection of those invoices. You’d lose out on the total value of your accounts receivable in exchange for fast cash.
There are potential drawbacks, of course. If the invoice factoring company provides less-than-ideal customer service, your customers may be upset and take their business elsewhere. And if some customers fail to pay, you can find yourself on the hook.
9. Keeping your accounting in line can help speed the lending process.
Nothing can be as frustrating as deciding that you need to find a fast small business loan and then discovering that it’s going to take excessive hours of work to gather the necessary paperwork to get one. It behooves you to make sure you’ve got all the necessary documentation on hand and up to date:
Resumes. Business lenders want to know about the entrepreneurs they’re lending to. Where have you been, and why are you an expert worth making a bet on?
Credit Reports. Your business’s credit will be examined by most lenders, and some will also want to know your personal credit score.
Tax Returns. Many sources of business funding request to see your company’s tax returns from the previous few years, along with your personal tax returns for the same timeframe.
Financial Statements. Financial statements will give the potential lender insight into your current financial condition as well as a projection into your future. These statements include your balance sheets, income statements, bank statements, and more.
Legal Documents. How’s your company structured? Is it a sole proprietorship? An LLC? A corporation? You’ll need to have those documents available. Also any contracts you keep with other companies, leases, and the licensing you need to operate.
10. Needing quick funding isn’t always a bad thing.
It might seem that fast business loans are only necessary when something terrible has happened, but that isn’t the case. In fact, there are several situations in which a business might find itself looking for fast funding for reasons that lead directly to growth.
For example, if a supplier offers a steep discount on inventory, seeking out fast financing can help make sure you’re actually saving money when stocking up on your most important products. Taking out a loan Or perhaps the fast funding can help launch a marketing initiative that’ll drive sales in the short term.
11. Fast loans can help you buy a new business
If a competitor is available for sale for any reason, from retirement to a pivot, you may want to pounce on the ability to acquire another company. Sometimes, a startup in your industry or area might be ready to get out of the business and is looking to sell. Or perhaps another company is situated in real estate you’ve been coveting.
Regardless of the reason, most business owners don’t have the cash on hand necessary to buy another business. And when it’s time to make an acquisition, there’s often not a lot of time to get the purchase completed. Seeking out fast business loans can help you come up with the necessary funds.