Competition between lenders has been a major driver of record approval rates for entrepreneurs to finance their small businesses. There are 4 main categories of lenders serving the small business community, each of which offer various advantages and disadvantages to business owners.
The 4 main types of small business lenders:
Loan approval rate: 28% in October 2019 (up from 26.9% the previous year)
Main benefit: low interest rates
Main downside: high minimum credit score
While the higher approval rates are encouraging, it’s worth noting that the big banks are still the toughest nut to crack from a small business perspective. The big banks have always been reluctant to approve small businesses, which is why the appearance of alternative lenders in recent years has been such a godsend. With that said, if your personal credit score is 650+ and your business has at least $10,000 in monthly gross revenues, then it is worth applying to the big banks because they offer very good rates.
Loan approval rate: 50.4% in October 2019 (up from 50.2% the previous year)
Main benefit: easy access to SBA loans
Main downside: not as online-friendly as alternative lenders
Like the big banks, small banks cater mainly to business owners with strong credit. However, they offer better access to certain products that the big banks shy away from – mainly SBA loans. An SBA loan is a fixed-rate loan issued by private lenders and backed by the federal government’s Small Business Administration. More than 800 lenders, most of them small banks and micro-lending institutions, are authorized to issue SBA loans. The minimum credit score is usually 700, which is very high, but the low rates and attention to detail offered by small banks makes it worthwhile.
Loan approval rate: 56.4% in October 2019 (down from 56.7% the previous year)
Main benefit: provide money to businesses that don’t qualify for banks
Main downside: higher rates than banks
Alternative lenders, comprised mostly of online and Fintech lenders, have totally disrupted the small business lending market. These lenders beat the banks on important fronts: they allow applicants to apply online, saving time and energy; and they impose flexible minimum requirements, making it easier and quicker to qualify. In most cases, online lenders charge higher rates than the big banks, but even that is changing. In the last 1-2 years, there has been a noticeable trend of Fintech lenders eliminating or reducing the fees associated with small business loans.
Loan approval rate: 39.7% in October 2019 (down from 40.2% the previous year)
Main benefit: access to a range of other business services
Main downside: technologically behind banks and alternative lenders
Credit unions are an important part of the lending landscape, mainly due to the fact they offer access to a wide range of financial products and services. Most credit unions serve their members only, and usually impose certain requirements on new members – such as military service or working in a certain industry. There are benefits to working with a credit union, although there’s also a major downside: for the most part, they lag behind other business lenders in online accessibility.
Where to Apply for a Small Business Loan
Choosing a lender for your small business depends largely on your personal and business financial situation. According to the Federal Reserve Bank Small Business Credit Survey 2019, 49% of small business owners reported requesting financing from large banks, 44% small banks, 32% online lenders, and 9% credit unions in the past year. (Some respondents requested funding from multiple lender types). The banks were easily the most popular choice for business owners with low credit risk. However, online lenders were the most popular choice for owners with medium/high credit risk, with 54% applying to online lenders vs 50% to the big banks.
With these stats in mind, here are a few things to consider before choosing a lender:
- Credit score. The higher your score, the better your chance of being approved by a bank. If your credit score is in the range of 650-680 or less, then online lenders are your best bet.
- Monthly revenue. The minimum requirement for banks and online lenders is usually at least $5,000 to $10,000 per month. However, because of the sheer number of online lenders that now offer business loans, it is possible to find lenders with more flexible requirements.
- Financial documents. You won’t be able to get a business loan without providing some sort of documentation, although it’s certainly easier with alternative lenders – some of which will approve a loan with just income and bank statements. The bigger banks are more likely to ask for things like financial projections and business plans.
- Convenience. If applying for a loan in person or over the phone doesn’t bother you, then by all means use a bank or a credit union. If you enjoy the comfort of applying online, then there are plenty of online lenders you can turn to (although some banks also offer streamlined online applications).
There’s No Time Like the Present
There are many different types of business loans, and many different types of lenders who offer funding. Before applying for funding for your small business, take the time to decide which type of lender is most suitable – and then go ahead and compare the best business loan lenders in that category.