Sometimes, small business owners don’t have time to wait for a financial institution to take weeks to decide if their company is worthy of a loan. No matter what type of business you run, things break, opportunities arise, business needs change, and a delay in a lender’s application process can lead to lost revenue for a business looking for funding. There are several loan options available to companies in need of fast funding. Read on to learn what can businesses do to be ready for those loans, and why some of these loans move so quickly.
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Who Offers Fast Small Business Financing?
Traditional banks and credit unions move slowly. It makes sense: they’re financial institutions able of underwriting large loans, and writing the wrong loan to the wrong borrower can result in a large amount of financial risk. In addition, traditional banks have to comply with more federal regulations and so they have to file additional paperwork and adhere to minimum standards when it comes to lending. Banks also have charters that define lending criteria and have less discretion over making individual loans that fall outside of their published rules for lending.
Generally speaking, the key difference between banks and credit unions is that banks are for-profit organizations where profits are distributed to shareholders and credit unions are run by members.
That’s why traditional small business lenders are often more stringent about borrower credentials. They’ll ask for higher credit scores, longer time in business, more annual revenue, and sometimes a detailed business plan. If you’ve got bad credit or are a newer startup, it may be difficult to qualify for funding from a traditional bank at all.
That’s where alternative lenders come in. Online lenders are often able to offer financing to borrowers with bad credit or less than perfect credit scores and credit histories. That’s because online lenders are smaller, more nimble, and sometimes more specialized than big banks. But, the main reason they can work faster is because they are not regulated the same way traditional banks are regulated.
This is an important distinction and one that borrows need to be aware of. While the alternative lenders may not have the same regulatory requirements as banks, they operate outside the traditional banking system. Many of the rules applied to banks are in place to protect borrowers and the banking system itself; so when dealing with a non-bank funding company, it’s important to understand the terms of your agreement. As with any financial contract, you should fully understand the terms of the financing before you sign. If you are unsure of any of the terms, ask for clarification or consult a trusted financial advisor.
Some online lenders offer only a couple of types of loans and sometimes even specialize in particular industries. They also use a fully online application process that doesn’t require coming into a brick-and-mortar bank. Online lenders can be your best bet if you’re running a new business with a short credit history.
Of course, you will pay for receiving fast funding from online lenders. Because these fast loans are sometimes smaller and made out to borrowers with poor credit, they tend to come with higher interest rates than loans from traditional lenders.
Everything in lending is a balance between risk and reward for both lenders and borrowers. Borrowers want to pay as little as possible for their funding and minimize risk to their assets. So do lenders. So if a borrower doesn’t want to put up any collateral or risk their personal credit, lenders might offer a very small loan with a high credit rate. If the borrower isn’t willing to protect the lender from loss, the lender wants to limit their exposure. Similarly, huge loan amounts at low interest rates are offered to companies with excellent credit, because great credit shows lenders that the borrower is a safe bet.
What Business Financing Options Are Available (and How Fast Are They?)
Many different types of loans are types of loans available to small businesses in need of financing. The speed at which your funds will be available will depend on factors like the type of loan you choose to go after and the lender from whom you’re borrowing.
Keep in mind that depending on your company’s credit, industry, and age, some of these loans will require collateral. If a loan requires collateral, it’s known as a secured loan, while a loan without collateral is known as an unsecured loan. In addition, some lenders will require an examination of your personal credit score or a personal guarantee in addition to the credit history of your company. Finally, think of why you need a loan as you consider these lenders. If you’re buying land, you’ll need a different form of funding from a company in need of a working capital loan.
Term Loans
The first category of small business funding is term loans. Term loans are given out as lump sums by lenders and repaid in regular payments with interest. Term loans are usually associated with banks and credit unions.
Short-Term Loans: Short-term loans are typically defined as having repayment terms of less than 18 months. These loans tend to be relatively small and come with higher interest rates. After all, it’d be hard for lenders to make money charging low interest on small loans.
Because short-term loans tend to be smaller, they’re often the term loans most available from online lenders.
How Fast is the Funding? If you borrow from an online lender, you can receive funding as soon as the same business day you apply. If you go through a brick-and-mortar bank, that same loan might make weeks.
Long-Term Loans: Long-term loans tend to be much larger than short-term loans. Because the repayment terms are so long, they often come with lower interest rates, as the lender will earn money over a longer period on a larger amount. That large amount makes these loans naturally riskier for the lender, so they may require a personal guarantee, significant collateral, or both.
That risk to the lender also means they’re very careful about the borrowers receiving these loans. Long-term loans will come with substantial minimum credit scores and other standards of creditworthiness. A long-term loan could be a good funding solution if you’ve got good credit, a long time in business, and a proven track record of monthly revenue. Long-term loans are helpful for big purchases, be they vehicles or real estate, or expensive manufacturing equipment.
How Fast is the Funding? It’s rare to find sizeable long-term loans from online lenders, and traditional financial institutions are slow-moving and careful about the borrowers to whom they lend these large sums of money. It can take weeks or longer to receive the payout of a long-term loan.
SBA Loans: SBA loans are comprised of three loan programs established by the United States Small Business Administration. While there are differences between the programs, all of them function in a similar way: the SBA guarantees loans made by third-party vendors.
That means if a borrower is unable to repay a loan, the government steps in and pays back up to 85% of the balance, protecting that lender from too much financial risk.
The three main types of SBA loan are as follows:
SBA 7(a): The most popular SBA loan program, these are term loans of up to $5 million and can be used for a wide variety of purposes, from working capital to equipment purchases.
SBA 504: These loans are particularly intended for purposes of creating jobs or improving infrastructure. If you’re upgrading a parking lot or building a factory that’ll require significant staff, you may want to consider a 504 loan.
SBA microloans: They function much like 7(a) loans, but have a cap at $50,000. The SBA funds these through community nonprofit lenders, which set the eligibility requirements and other criteria for lending.
If you’re considering an SBA loan but aren’t sure which one works best, the SBA hosts a helpful Lender Match tool to help decide which is most appropriate for your business, credit, and needs. These loans can be complicated, but qualifying borrowers often get an excellent price for financing.
How Fast is the Funding? The SBA’s guarantees are taxpayer dollars, so they’re very careful about the companies to whom they’re lending. The loan application itself is formidable and the time between application and decision can last months. These are not quick loans.
Equipment Loans: Named for their purpose, equipment loans don’t have the sort of generalized utility of other term loans. You won’t get an equipment loan to boost working capital or buy inventory.
Instead, equipment financing works by the lender holding the equipment in question as collateral. The borrower makes a down payment and then monthly payments to the lender. If the borrower defaults, the lender takes possession of the equipment and sells it, protecting them from undue financial risk.
How Fast is the Funding? Equipment loans are a form of financing available from a number of lenders, and that includes quick-funding online lenders. Some online lenders offer equipment financing in as soon as a single business day.
Revolving Lines of Credit
Revolving lines of credit are a form of lending in which the borrower can repay and then reborrow from an amount under an agreed-upon credit limit.
Business Lines of Credit: Many online lenders offer business lines of credit. Able to be withdrawn as cash, lines of credit are excellently used as a debt-based rainy day fund, where borrowers can rest assured that if an unexpected expense or unforeseen opportunity arises, they’ve got sufficient credit available to make the necessary purchases.
How Fast is the Funding? Lines of credit can be made available very quickly. Depending on the size of the line of credit, approved businesses may be able to access funds in as little as 24 hours or as long as several weeks.
Business Credit Cards: Business credit cards work just like your personal credit cards. You receive a credit line and a card. Then you make payments and pay interest only on what your company borrows. Many business credit cards also mirror personal cards in that you can earn cash back or other rewards with regular spending.
How Fast is the Funding? Very quick. Some card issuers will make credit choices on the same day you apply, and you’ll have access to the credit line not long after that.
Alternative Financing
Finally, there’s alternative financing. These financing options are prime ways of getting quick cash for your business. They’re among the fastest forms and also don’t have the same credit score requirements that come with many types of loans, because they’re not loans.
Merchant Cash Advances: Merchant cash advances, or MCAs, are the process of a company purchasing a percentage of your business’s future debit and credit card transactions. You’ll make daily or weekly payments instead of monthlies, and the size of those payments will vary based on the volume of sales.
While loans and lines of credit make money by charging interest, cash advances use factor rates. A factor rate is typically a number between 1 and 2 which is multiplied by the size of the advance to find the total repayment amount. If you take out an MCA of $6,000 at a factor rate of 1.2, you’ll repay $7,200.
Because the repayment amount is fixed, the annual percentage rate of an MCA can be much higher than other forms of business financing. And the daily repayments can restrict cash flow if there are already times when your business sees lower-than-normal sales.
How Fast is the Funding? Very fast. Some MCAs are able to hit your bank account on the very same business day you apply.
Invoice Financing: Invoice factoring can be a solid option if your company takes most of its payments via invoice. Invoice factoring companies buy your unpaid invoices at a discount, providing your company with fast cash. If you have $10,000 in unpaid invoices, a factoring company might pay you $8,000 for the ability to receive those payments. You’re effectively paying $2,000 for the cash upfront.
How Fast is the Funding? Also very fast. If you’ve got the paperwork on hand and ready to go, you can receive invoice factoring financing on the same day you apply, as it is by definition a purchase and not a loan.
