Running a small business has never been easy. One day you are the head of product development. The next you are leading business development. All the while you are trying to pay bills while having enough money to grow.
This can be a challenge, especially when traditional lenders are out of sync with the realities of small businesses. One option which is getting more interest recently is growth financing where business owners can use their debt, equity and financing choice to expand their business. Some of the more popular choices for growth financing include the Small Business Administration (SBA) and the legion of alternative lenders who have cropped up in recent years.
The SBA
The SBA is a government organization who supports small business across the country. While they do not make loans, the SBA sets guidelines for small business loans. These can include traditional banks, finance companies, and even microfinance lenders.
One of the advantages of an SBA loan is that the government will cover anywhere between 75 to 90 percent of the loan. This takes away much of the risk involved in lending to small businesses, even when they are growing.
But like anything involving the government, SBA loans tend to be have a lengthy application process and in some cases even extra fees. I suppose, no one at the SBA has ever run a small business. If they did they would know that business owners don’t have the time for all of this red tape. That being said, SBA loans are significantly better than traditional bank loans.
Alternative Lenders
This is a relatively new category of lenders who have recognized the fact the big banks and the government are doing little to help the little guy. These lenders have a large number of programs to help small businesses grow.
In fact, they have become the market solution to a massive problem. From 2011 to 2016, banks approved less than 20% of small business loans. In the same period, alternative lenders approved more than 60% of applications.
The industry is growing fast. This is actually a plus for small businesses as the growth drive new programs and spurs small businesses to grow even faster. By 2025, the alternative lending industry for small businesses is estimated to be more than $200 billion.
Besides higher acceptance rates and more selection, alternative lenders usually have streamlined application processes. This leads to faster funding. So you can get the money you need to help your small business grow faster than traditional banks or the SBA.
However, some programs also have higher interest rates. So you should shop around and see which lenders have the most flexible programs and terms. Using a business funding lender to bridge growth costs, especially an alternative lender, can be a real boost to your business.
Loan Types
The SBA’s primary loan program is the 7(a). These loans can be used for working capital, equipment purchases, construction, and even renovation. 7(a) loans have a maximum limit of $5 million and you have to apply through accredited lenders.
The SBA also offers a microloan program for loan up to $50,000. This program has become increasing popular in recent years. Repayment depends on the loan amount, the use of funds, and the intermediary lender’s requirements. While these loans are the most popular offered by the SBA, they also offer real estate loans and disaster loans among others.
Granted the SBA is a wonderful program and it has helped many small businesses. However, its programs are only offered through intermediaries and this is the challenge. Alternative lenders are often more flexible than SBA loans. This is especially true when you need a lender to bridge growth costs.
Alternative loans can include peer-to-peer loans, merchant cash advances, working capital loans, invoice factoring, inventory loans, and many more options. In fact, that is what makes the world of alternative lending so exciting – all of the options.
Unlike SBA loans, there is no one set guideline for alternative loans. This also means you have more choice in finding the right lender to help bridge growth costs. Another plus of alternative lenders is that they are usually the direct lenders. That is, they are lending their own money. As such, they can make decisions faster.
You have choices when seeking financing to meet your growth needs. The best way forward is to look at the available options and figure out the best fit for you. Failing to do so might mean that you will not grow as fast as you could.
