When you need working capital for your growing business, you have plenty of options: a loan from the U.S. Small Business Administration, lines of credit, revenue loans and business credit cards, to name a few. But with so many choices — including a plethora of online alternative lenders — it’s not always easy to determine the best one.
Take the time to compare small-business loans and other financing options, and as you do, ask yourself these key questions.
How quickly do I need the cash?
Some sources deliver money within hours or days. For example, if you apply for a line of credit with online lender Kabbage, you can get approved within minutes and have the cash in your PayPal or business checking account immediately. A credit card, on the other hand, can take a few weeks to arrive in the mail once you’re approved, and a bank might take months to make a decision on an SBA loan.
As you look at financing options, consider how long you can wait for funds. If you have broken equipment that needs immediate repair, a traditional bank loan backed by the SBA may not cut it.
But fast money is expensive money. If you can hold out for a better deal, you should, says Blake Petty, director of the Center for New Ventures and Entrepreneurship at Texas A&M University’s Mays Business School.
In a bind with limited affordable options? It might be best to borrow from friends or family, or consider an equity deal — giving up a piece of your business in exchange for cash — to avoid costly debt, Petty says.
Do I know what my lender expects of me?
Different types of financing require varying forms of underwriting and documentation, and Petty says many small-business owners don’t spend enough time learning each lender’s requirements — and waste time and energy applying for loans they won’t get.
For example, some business owners write only one business plan and hand it to both an angel investor and an SBA lender. “Come to find out, those two want very different things, and you’ve probably not delivered what either want,” Petty says.
You should also learn what goes into the underwriting of your prospective loan, starting with the range of credit score you’ll need. Online small-business lenders, including OnDeck, Kabbage and Dealstruck, are typically more accepting than traditional banks of lower credit scores, but might charge high interest rates in exchange for that luxury.
Some lenders require a specific amount of annual revenue or time in business, and some even consider the number of people you employ. Many want to look at your tax records and bank statements. Lenders such as BlueVine and Fundbox, which offer inventory financing, care more about your invoice history, while a revenue-based lender, such as Lighter Capital, focuses on your revenue performance.
Know that bank and SBA loans have the most strict and comprehensive underwriting requirements and often require a personal guarantee, but they also typically have the lowest interest rates, so be prepared for this trade-off.
What fees will I have to pay?
Some lenders charge origination fees that can eat into your loan, and others charge a penalty for early repayment. If you rely on business credit cards, know that some come with hefty annual fees. Be aware of the full cost of your loan in addition to the interest payments.
How quickly do I want to repay?
The speed with which you can repay the money will help determine which type of small-business financing is best for you.
Do you want a short-term loan? OnDeck offers loans with terms from three to 24 months. Need longer? Lending Club offers repayment terms between one and five years.
Kabbage offers large and flexible lines of credit, but you must repay each draw within six months. Credit cards have small minimum payments, making repayment very flexible — but if you don’t stay on top of payments, it’s easy to get in over your head.
The bottom line
There are many financing options available to small-business owners, and it’s worth the effort it takes to choose carefully. Going with the wrong type of financing can be detrimental to your business’ bottom line, while picking the right one can help it flourish.
Do your homework and examine your options:
To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
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