Where to Find the Best Private Business Loans: The Complete Guide
For a small business, getting a loan from a big bank isn’t easy. Large banks are beginning to warm up to loaning to small businesses again, but the latest Biz2Credit Small Business Lending Index showed they approved just 26.5 percent of small business loan applications it received.
Of course, big banks aren’t the only lenders in town and small business loan applicants fare much better with credit unions (40.2 percent approval), small banks (49.8 percent approval), alternative lenders (56.6 percent approval) and institutional lenders like pension providers (64.9 percent approval). Many of these other lenders (particularly alternative lenders), stepped in to fill a vacuum when the recession hit in 2008 and banks started cutting back on loans they gave to small businesses. In 2011, for example, big banks approved just 10 percent of small business loan applications.
Alternative lenders offer quick and easy financing, but also usually much more expensive financing due to higher interest rates and shorter repayment terms. These companies offer products similar to those from banks, such as term loans and business lines of credit, but also financing like invoice factoring and merchant cash advances.
What is a private business loan?
Quite simply, a private business loan is a loan from a non-bank lender. This can include small business loans from investors, online lenders and even U.S. Small Business Administration (SBA) loans. Generally, small business owners turn to these loans when they can’t get a loan from a bank or in some cases (like borrowing from friends or family), want to save on interest.
There are many types of private funding. The most common ones include:
SBA loans — The SBA does not loan money directly to small business owners, but offers loan products through lenders. Most of those lenders are banks, but some are private lenders such as community nonprofits or online lenders. No matter the lender, the SBA, a government organization, guarantees a portion of the loan. These loans have high borrowing limits, long repayment terms and good interest rates. They’re also hard to get, requiring good credit and strong revenues.
Term loans — These are often similar to the term loans offered by big banks, but usually easier to qualify for. The loan is a lump sum in advance that must be paid off with set monthly payments. They are the most affordable of the private business loans, but also usually the hardest to get.
Short-term loans — These loans are often between three and 12 months in length and repayment is typically due daily or weekly. They usually have higher interest rates than longer term loans, but have lower approval requirements. An online lender might only require a credit score of 500 to 500, $100,000 in annual revenues and six months to a year in business operation.
Lines of credit — Similar to a business credit card, business lines of credit allow business owners to draw from a set amount of cash. They only pay interest on how much they draw and most lines are revolving, meaning that once part of the line is paid back, it can be drawn from again.
Equipment financing — This is usually a longer loan used to pay for equipment such as work vehicles or computers. The equipment being financed often serves as collateral for the loan.
Invoice financing — With invoice financing, a business owner uses unpaid invoices as collateral to secure a cash advance that’s equal to a percentage of the invoice value. As the invoices get paid, the financing company releases the remainder of the invoice value, minus an interest fee.
Merchant cash advances — This is a cash advance that a business owner pays off with a percentage of their daily credit card sales, plus a factor rate that acts as interest. Bad credit is not an obstacle to getting a merchant cash advance.
Peer-to-peer loans — Also called crowdlending, these loans are often a match made through an online platform between an investor or group of investors with a business owner looking for a loan.
Who are private business loans for?
Traditional banks are where you’ll find the best interest rates, unless an investor or family member is willing to cut you a good deal. So private business loans make the most sense for business owners who don’t meet the qualifications for a bank loan or who need money very quickly. Those qualifications usually are a credit score of 680 and above, two years in business and $100,000 in annual revenue. Many banks also require collateral. New business owners or ones with poor credit would probably find it hard to qualify for most bank loans. Many private business loans, meanwhile, are aimed squarely at owners with poor credit or who might meet some but not all of the qualifications (such as strong business revenue, for example).
Financing products like invoice financing and merchant cash advances, for example, place more importance on a company’s revenue and customers’ credit than on the credit history of the business owner.
Who are private business lenders?
A private lender is essentially any non-bank financing provider. That can include nonprofit lenders, investors or family and friends. Most commonly, it’s the growing, online-based alternative lenders.
With some exceptions, these loans have much higher interest rates. That’s partly because online lenders loan to “riskier” borrowers — those with poor credit or not much credit history, newer businesses or businesses with lower annual revenues.
Here is a look at some of the top private lending companies:
- BlueVine — BlueVine is a private online lender that offers invoice factoring and a business line of credit. The company only requires a credit score starting at 530.
- Can Capital — This online lender offers both short- and long-term loans as well as merchant cash advances. The term loans can be up to 18 months and dollar amounts of $2,500 to $250,000.
- Fundbox — Fundbox is an online lender that offers invoice financing and lines of credit (both capped at $100,000) with low eligibility requirements, including just $50,000 in annual revenue and six months of business operation.
- Lending Club — LendingClub offers loans with fixed rates (somewhat rare for online lenders) with borrowing amounts of $1,000 to $40,000 and terms of 36 or 60 months. There’s also no penalty to pay off your loan early.
- OnDeck — OnDeck is an online lender that offers short- (up to 12 months) and long-term loans (up to 12 months) as well as a business line of credit. The company has fairly typical and attainable approval requirements of a 600 and above personal credit score for at least one owner, $100,000 in gross annual revenue and one year in business operation.
- Rapid Finance — Rapid Finance is an online lender that offers several small business funding options, including term loans, a merchant cash advance, line of credit and SBA bridge loan.
- SmartBiz — SmartBiz offers SBA loans, including the SBA’s most popular 7(a) loan. Its SBA loans have APRs starting at 4.75%, funding ranges from $30,000 to $5,000,000 with repayment terms as long as 300 months. SmartBiz also offers several non-SBA loans with funding between $30,000 and $200,000. The approval qualifications for the SBA loans are higher than for many private loans. You’ll need a credit score of 650 for an SBA loan and two years in business operation.
- The Business Backer — The Business Backer offers a huge number of financing products from term loans and SBA loans to equipment financing and a merchant cash advance.
- Upstart — Upstart is a peer-to-peer lender that offers personal and business loans, capped at $50,000, making it a good option for businesses looking for smaller loans.
Rates are accurate as of March 1, 2019
The pros and cons of private business loans
You’ll need to do your homework and make sure you fully understand the structure and expense of any private business loan. That’s because a major drawback of private loans is that they tend to be much more expensive than a traditional loan. The interest rates are much higher and the loan terms usually shorter, requiring more frequent payments.
On the plus side, they are much easier to get and time to approval and funding is much quicker. Private lenders also have lower requirements and thus approve a higher percentage of the applications they get for small business financing. Funding also can happen in days versus weeks or months for a bank loan.
How much could you borrow with a private business loan?
The bottom line
If you’re a new business, or one without much credit history or poor credit, private loans can give you access to funding that you might be denied at a large bank. But you’ll need to be cautious. Always convert any interest into an APR so you can compare different loans, ask about any fees, and get a clear picture of how much you’ll owe and when and how you’ll need to pay it.