Non-Bank Options for Small Business Loans
Steady cash flow is critical to the success of your small business. The best way to manage cash flow is to be sure that you send invoices out on-time, and to have customers that pay on time. Unfortunately, that is not always easy to achieve.
Using a solution like PaySimple for email invoicing, recurring invoicing, recurring billing, and automated payment plans is one approach to cash flow management. But not all customers are amenable to such arrangements. And, if your small business is lucky enough to have sizable orders from big business or government customers, long payment terms can simply be the cost of doing business.
So, how do you get the funds to pay for materials required to fill those big orders, and how do you keep your employees paid and your lights on while you are waiting for those invoices to be paid? Further, how do you get enough of a cash reserve built-up for important business growth projects like expanding to new locations, buying new equipment, or building inventory?
The traditional answer is to apply for a loan, either directly from a bank or via the U.S. Small Business Administration SBA Loan program. However, SBA loans can require lots of paperwork, extensive business and credit checks, and can take months to get approved.
The following alternatives to traditional bank loans are worth considering, particularly if your business is new, your credit is less than stellar, and/or you need a very short-term loan.
Credit cards are an easy way to finance all types of business expenses for very short terms. If you pay off your entire balance each month, there are no borrowing costs, and you can even earn cash-back or rewards for your purchases. If you don’t pay off the balance, or if you miss a payment, interest charges can be steep and compound quickly. Credit cards can also be used for cash advances, but even if you are offered attractive terms for the short term, if you don’t pay during the introductory rate period, you are in for a nasty interest surprise.
There are seemingly endless choices for a small business credit card, but most will want a personal guarantee from the business owner and will not simply issue the card to the business. Because of this, you may actually be better off simply getting a consumer credit card and using it to charge your small business expenses. As this US News & World Report post explains, there are far fewer cardholder protections in place for small business credit cards than there are for consumer cards.
Whether you want a small business card, or a consumer card, these resources will help you evaluate competing offers and choose the one that best meets your needs.
- Google Small Business Credit Card Comparison Table and Google’s full listing of Credit Card Offers (64 in all) that can be sorted by categories such as best for 0% APR, poor credit, cash back, or rewards points.
- Card Hub’s Best Business Credit Cards for Excellent, Fair, and Bad credit.
- Get.com’s post Our Best Rated 19 Small Business Credit Cards for 2015.
- NerdWallet’s Best Credit Cards of 2015. This post covers both consumer and business cards, and provides detailed information that will help you zero-in on the best fit for your small business.
Advances Against Invoices
Invoice Factoring and Invoice Discounting are nothing new. But several online companies have leveraged the practices of advancing funds based on expected invoice payments (discounting), and purchasing outstanding invoices as a discount (factoring) to provide cash advances to small businesses.
The upside to these services are fast access to cash, even small sums, that enable small businesses to smooth out bumps in cash flow. The main disadvantage is relatively high fees for the service, which can translate into annual interest rates exceeding 50%. (As these companies are not classified as “financial institutions” they fall outside banking laws and restrictions on lending practices.)
Two services to consider are:
- Fundbox. When you sign-up for Fundbox you link your business bank account and your invoicing software. Then, after being approved for an account (which includes a background check and credit check), you can select individual invoices for which you would like advance payment. When you do this, Fundbox will display the fees required for a 12 week loan for the selected invoice. (You can get advances on as many invoices as you like, up to your assigned credit limit.) For example, a 12 week $2500 loan incurs between $124 and $174 in fees split evenly across the 12 weeks. (That’s equivalent to a 40 – 55% APR, but not only is there no penalty for early payment, it results in all unpaid fees being forgiven. So in the best case, if you borrowed the $2500 for only a week, it could cost under $25—a bargain if it means the difference between making or missing payroll.) When you accept the terms, you typically see your funds the next day. Deposits are made directly to your linked bank account, and loan payments are automatically deducted from the same account. According to Fundbox, as you build up history with them your borrowing costs decrease.
- BlueVine. This service follows the factoring model, but emphatically states that it is “not a factoring company” because it enables you to continue to own the relationship with your customer. After signing up and getting approved for a BlueVine account (which includes a credit check and business review), you either link your invoicing program to it or send invoices created in BlueVine to customers. BlueVine assigns your business a bank account and PO Box which bears your business name, but which BlueVine controls. This makes your financing choices invisible to your customers—they will never know about your BlueVne account. To collect advance payment on an outstanding (but not past due) invoice, simply request it for funding. BlueVine will deposit 85% of the invoice amount into your account, typically next day. You instruct your customer to send ACH payment to your BlueVine bank account, or mail a check to your BlueVine PO Box, by the invoice due date. When BlueVine receives the funds, it pays you the invoice balance, less fees which start at 3% of the total due, and increment by 1% a week. (See full pricing details here.) BlueVine will only accept accounts for B2B small businesses, so if you have a consumer customer base, this service isn’t for you. If you are a B2B small business, check out this video to see BlueVine in action.
Short-term Credit Lines
Ideal for unsecured loans for relatively short time periods, online small business credit line providers can be a convenient choice. The following two companies use proprietary underwriting schemes, rather than simply credit scores, and use an analysis of a small business’ operations to determine credit line and interest rate.
- Kabbage. Kabbage provides short-term loans to small businesses by accessing their operational accounts–such as checking accounts, eBay, Etsy, and Amazon seller accounts, QuickBooks accounts, PayPal accounts, and more—analyzing the business and its cash flow, then offering a line of credit and interest rates based on its estimation of repayment risk. Kabbage will offer lines of credit up to $100,000 with up to 6 months to repay the loan. You can take a single lump sum, or access your credit line for small amounts as they are needed. Deposits and payments are made via a linked bank account or PayPal account. Fees range from 1 – 13.5% of the loan amount for the first two months, and then 1% of the total amount for months 3-6. There is no early payment penalty. To see how Kabbage works, check out the videos in the Help Center.
- OnDeck. This company offers loans and credit lines to US small businesses which have been in business for over one year, have at least $100,000 in annual revenue, and whose principals have a FICO credit score of over 500. (That’s a pretty low bar.) When you apply for a term loan ($5000 – $250,000 for 3-24 months) or a line of credit (up to $20,000 for 6 months) they use a proprietary system to determine your credit limit and interest rate, based on their OnDeck Score™ for your business health. Interest rates are hefty, typically 20 – 50% APR plus origination fees for term loans and maintenance fees for credit lines. And, OnDeck only lends to specific business types (see an exclusion list here). But they do provide personal loan counselors to help you manage your small business finances, and they claim to fund loans in 24 hours with a simple online application—which is more convenient than a traditional bank loan. If you have less than perfect credit, need cash fast, and you are willing to pay for that convenience, then OnDeck is worth a look.
Peer-to-Peer lending services match businesses needing credit with investors who have money to lend. This enables borrowers to bypass banks when in need of funds, and it enables investors to get better returns than they would be able to achieve with traditional banking products. Loan interest rates and fees are typically comparable with those available from banks, and the loans are generally secured (for example by a lien against the business) and require the borrower to have good credit. The advantage to small business borrowers is a simple online application process, and quicker funding than is available from banks. The following are two well-regarded peer-to-peer lending services.
- Funding Circle. The company specializes in small business loans and offers loans of up to $500,000 at rates as low as 5.99% (with a 2.99 – 4.5% origination fee) for terms of 1 – 5 years. After completing an online application, you are contacted by a personal loan specialist and asked to provide additional documents. If you are approved, your loan is typically funded within two weeks. This Funding Circle chart highlights the differences between their loans, typical SBA loans, and traditional invoice factoring /cash advance loans.
- Lending Club. This lending service truly brings borrowers and lenders together. A prospective borrower applies for a loan, and then after being approved by Lending Club for a loan amount and rate, and accepting the loan, individual investors fund the loan either in full or part. Lending Club handles all the logistics, and both borrower and lender(s) win. Small businesses can borrow up to $300,000 for 1 – 5 years, with interest rates between 5.9 and 25.9% (depending on credit risk), origination fees between %0.99 and %5.99, and no pre-payment penalty. Loans under $100,000 can be unsecured, and no appraisals, business plan or projections are required to be submitted. Lending Club does not operate in IA, ID, ME, ND, or NE, but if your business is not in one of those states you will likely qualify if you own at least 20% of your small business, have at least “fair” credit, have been operating for over 2 years, and have at least $75,000 in annual sales. Lending Club offers both business and personal loans. Learn about their small business loan program here.
So, the next time you are facing a cash flow problem, don’t feel you have to turn to a bank and the often nightmarish small business loan process. Give one of these alternative lending sources a try.
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