For many small business owners, access to a little extra working capital would be the golden ticket to reaching for their company’s next level of growth. All the same, no wise entrepreneur can even contemplate taking out a loan to fund their business without asking in the very same breath—but what will it cost?
Fortunately, there are loans available for small business owners that will get you the working capital you need without breaking the bank. To help you understand your options, let’s take a look at the four most affordable types of business loans, along with the pros and cons of each.
There’s simply no denying that traditional bank loans offer the lowest interest rates around. If you’re looking for single digit interest rates, a bank loan is an obvious choice. The problem, though, is that if your business can qualify for a small business loan from a traditional bank, you probably don’t actually need one.
Since the 2008 recession, banks have severely tightened the reins on loans made to small businesses. Citing the high risk of small business lending, many of the largest banks have left this sector almost completely. As a result, many hopeful business owners find themselves completing lengthy bank loan applications and waiting through long underwriting processes, only to be turned down for a bank loan.
Only top tier borrowers have a chance of qualifying, which means you need to have perfect credit, strong revenue, profitability, cash flow, years in business, and more. Otherwise, you’re likely better off sacrificing a couple of percentage points in annual interest to pursue a more accessible type of business loan.
Bank lines of credit
A bank line of credit is a slightly different type of business loan, but comes with similar interest rates and most of the same pros and cons as a traditional bank loan.
Essentially, a bank line of credit works similarly to a credit card, offering you a certain amount (or “line”) of funds available from which you can draw as needed. The added benefit of a line of credit is that you pay interest only on the funds you actually use, allowing you to further minimize your cost of borrowing.
Like with bank loans, lines of credit from traditional banks also tend to involve long application processes and very stringent qualification standards, so those with less than perfect credit need not apply. As an alternative, though, many online alternative lenders also offer lines of credit in their product lines with most of the same benefits as a bank line of credit.
In many ways, obtaining a loan through one of the U.S. Small Business Administration’s (SBA) loan programs is the best possible option for small business owners. That’s because SBA loans come with the same low-interest rates—typically starting at 6.5 percent—as a bank loan, but have more accessible qualification standards than you may find working directly with a bank.
Here’s how it works: Rather than lending money directly to small business owners, the SBA works with intermediary lenders (i.e. the same banks you’d likely be working with to obtain the two products above) to guarantee a portion of the approved borrower’s loan. This guarantee means that if your business fails or you default on your debt, the SBA promises to cover the lender’s costs. By managing this risk, the SBA incentivizes banks to accept small business loan applications that they may otherwise turn away.
The biggest downsides to applying for an SBA loan are time and paperwork. Because both the agency and the lender have their own separate application requirements and underwriting process to go through, approval and funding for an SBA loan will take at least a month—and sometimes much longer. If you’re holding out for this low-cost option, prepare to hit the pause button on your business growth while you’re waiting for funds.
Long-term online loans
Functionally speaking, there is very little difference between a long-term online loan provided by an online alternative lender and a traditional bank loan. Borrowers seeking long-term online loans typically find the same payment schedules, with the main differences being functions of accessibility, timing, and cost.
Because online alternative lenders use a wider variety of methods and more lenient qualification standards to determine a borrower’s eligibility for a loan, they accept a much higher percentage of applications than bank lenders do. Simply put, you have a far better chance of being approved for a loan from an online alternative lender than you do from your local bank.
And because of the online lenders’ heavy use of technology in their underwriting process, they can review and approve loan applications far more quickly, getting you cash in hand within just a few days. That’s great news for business owners eager to get started quickly with their business growth.
Of course, speed and accessibility do come at a cost. While still among the four most affordable types of business loans, long-term online loans do come at a higher cost than traditional bank or SBA loans, with interest rates in the 7 to 30 percent range. Applicants with better credit histories can enjoy single-digit interest rates, while higher risk borrowers with less than stellar credit are likely to pay a higher interest rate. Even so, many business owners find the speed and convenience of working with an online alternative lender to be worth the minor increase in annual cost.