By Sean O’Malley
Over the last decade more lending options for small business owners have emerged. But with more options there is more complexity in determining which loan is ‘right’ for your small business. Businesses can still go to their local bank, but online bank and non-bank options have emerged with strong advantages worth considering.
Adding to the dizzying array of lenders, new credit products with rates based on credit risk have also emerged. These products have been created as online lenders attempted to develop products to support the needs of small businesses across the credit spectrum nationally.
The net result is a more complex lender landscape where many more small businesses get loans faster, but many still don’t get the low rate their business deserves.
To help in determining the right lender many small businesses have turned to brokers and online lender comparison sites. While these services can certainly be helpful, brokers and comparison sites may sometimes steer borrowers to lenders who pay them the most as opposed to those lenders that have the best rates.
As such, it’s wise for small businesses to ask some key questions to improve the chances of finding the right lender with the best rate. Here are the 5 questions that really matter:
Will the lender say “Yes” to the amount I need?
Before you begin, understand which lenders match up with your business funding needs and basic credit profile. Specifically, you need to understand if your use of funds, credit score and business revenue matches the credit requirements of the lender you are targeting.
A great tool to quickly focus in on the few lenders that match your needs can be found at NerdWallet’s 2017 small business lender comparison tool.
What is the offered APR?
Although APR (Annual Percentage Rate) is not perfect, it gives you a nice standard way to compare interest and fees across different lenders. As such, APR should at least be one of the comparison tools you use. With that said, you’ll still need to determine the actual rate a lender is willing to offer your business before committing. This is because most lenders will advertise APR ranges with a deceptively low entry point, so they can adjust their product based on the credit risk of the business. Don’t assume a lender with a large APR range and a low teaser rate will give you the lowest rate. What’s important to your business is the APR you are offered, period.
Also, be sure to focus on APR and not the interest rate when comparing loans as the interest rate alone does not take any other expenses into account. In contrast, APR is the combination of the interest rate and any other costs or fees involved in obtaining the loan. As a result, an APR tends to be higher than a loan’s interest rate and a more accurate measure when comparing products.
How much is my monthly payment and are there any prepayment penalties?
Another extremely important financial comparison to make among loan alternatives is how much your business will pay on a monthly basis. Some products offer APRs that may look reasonable but their repayment period (or term) is so short that the monthly payments may be onerous on the business because of the negative impact on cashflow. You’ll want to know exactly what you need to pay in upfront fees and on a monthly basis and match that up with your expected cash flows and compare to the other credit products you are considering.
Also, you’ll want to understand if there are prepayment penalties. Ideally, there are none. However, if there are penalties, be sure to carefully consider whether or not you may want to pay off the loan early. Many times businesses want to re-finance loans because they can access lower cost capital as their business matures. However, prepayment penalties may significantly reduce or eliminate the savings from refinancing.
How fast and easy is the process to get funded?
One of the advantages of online financing solutions is the speed of funding. Nowhere is this more evident than for SBA loans where the traditional local bank process typically takes 120 days from application to funding. The emergence of online SBA marketplaces have reduced the SBA loan process by as much as 90% allowing small businesses to get funded in as fast as 7 days after their application is completed. This has created better experiences for small businesses. As such, you’ll want to ask what lender’s typical funding time is and the documents needed to apply before committing to any process.
But keep in mind that faster funding sometimes comes at a higher cost of APR because lenders face more risk in these situations. So, if you don’t need funding immediately, it may really pay off to work with lenders who can offer lower APRs but may take somewhat longer to complete the application to funding process …like SBA loans typically do.
How do other small businesses rate the lender?
It’s also prudent to make sure the lender you are going to do business with has had overall positive experiences with its customers. The Better Business Bureau is a good source to start but online review communities have emerged like Trustpilot which have richer and typically more recent customer reviews. You’ll want to make sure the customer experiences resonate with your expectations.
If you are starting or on your way to obtaining small business financing, using these questions to compare different lenders should help steer you in the right direction to get the best rate your business deserves.
Sean O’Malley is the co-founder of SmartBiz Loans. Sean has extensive start-up experience and was at Venrock venture capital, where he managed the firm’s tech incubator. Sean joined Venrock from Yahoo!, where he held product and international strategy roles focused on driving consumer growth in international markets.