Did you know the number one reason a small business changes their accountant is because they aren’t offering proactive advisory services?
With the emergence of the cloud, it’s more important than ever for you step into the role of a financial advisor for your clients. They need, and want, as much financial insight as possible. And who better to give it?
Last month, we discussed how you can step in as an advisor when you see your clients about to face a cash crunch. The typical go-to recommendation would be to send them to their local bank. But, with bank lending to small businesses at an all-time low, it’s time to learn more about this world of alternative lending, and how you can guide your clients through the process.
If you missed it, you should definitely read our intro piece on the “world of alternative lending.”
So, what types of loan products are out there for your clients? And how do you know which one is right for them?
Let’s take a look at the top 5 small business loan products available for your clients, along with the advantages, disadvantages and costs of each.
1. Traditional Bank Loan
A bank loan is the “traditional” business loan. They have a set repayment time, set number of payments, and can have fixed or variable interest rates.
- Advantages: Traditional bank loans will always have the lowest interest rates. They are the most affordable option for a business loan.
- Disadvantages They are the hardest product to secure (both in the time it takes to apply and the overall approval rates.) The banks require extensive documentation, such as financial statements, business history, and many other documents before they can approve – and in the end, big banks only approve approximately 20% of their applicants. Yikes!
- Cost: Bank loans are usually paid back over the course of several years. Rates are definitely in the single digits, usually under 8%.
2. Non-bank Term Loan
A non-bank term loan looks similar to a bank loan, but it offers faster access to capital and higher approval rates. The main product of the new online lenders that have sprung up to fill the void left by banks, these term loans (which range from short to mid-term) offer a solid middle ground between borrowing from a bank and getting a merchant cash advance.
- Advantages: Rather than a 20% approval rate (like the big banks), data suggests that approval rates for alternative lenders are as high as 60%. The chances of your client successfully finding a loan are drastically higher. They will also receive money much faster than with a bank loan. Six months? Try two days.
- Disadvantages: A non-bank loan will cost more money than a bank loan, as they have higher interest rates across the board.
- Cost: You can get much smaller loans with a non-bank loan (as low as $2,500). Interest rates start at 6% and can go up to 30%.
3. Line of Credit
A line of credit is the most flexible option for your clients. Once it is established, they only draw on it when it’s needed.
- Advantages: Your clients will only pay interest on what is used. A line of credit makes for a great cash buffer in case of an emergency.
- Disadvantages: Newer and less-established businesses can have trouble qualifying for this type of product. However, if your client has a strong personal credit score, there will be some options available to them if they are a younger business.
- Cost: Businesses can receive a line between $10,000 and $1 million (sometimes more) to be paid back anywhere between six months and five years, with about a 7 to 25% interest rate. The lower the credit score, the higher the rates.
4. Merchant Cash Advance
A merchant cash advance is an option for those businesses with poor credit or a lack of collateral. They receive a set sum upfront that is paid back (along with a fee) by authorizing the MCA provider to take a fixed percentage of daily credit card receipts until the amount has been repaid.
- Advantages: MCAs open up credit opportunities to businesses that can’t qualify for other loan types. And since they repay the advance with a fixed percentage, there are no minimum payments. They pay larger amounts when business is booming, and smaller ones when business is slower.
- Disadvantages: A cash advance can severely hinder cash flow, as its coming from daily sales. As well, merchant cash advances are the most expensive loan option out there. Make sure your client applies for all other loan types first.
- Cost: Fees are quoted as a factor rate and can range from 1.14 to 1.48. The amount advanced is multiplied by the factor rate to determine the total pay back. For example, looking at a $60,000 loan:
$60,000 advance x 1.14 factor rate = $68,400 owed to the provider
5. Business Credit Cards
A business credit card provides easy access to a line of credit. However, if the balance isn’t paid in full each month, your client will incur an interest charge.
- Advantages: Business credit cards are easy to qualify for. In fact, just under 50% of small businesses receive the capital they need via credit card. They’re great to have on hand for smaller, everyday purchases.
- Disadvantages: The rates are drastically higher than with a line of credit. As well, if you need hard cash, using a credit card to get it will make those interest rates soar even more.
- Cost: Providers usually charge a much higher interest rate (1-3% over prime) than with bank loan or fixed line of credit.
These are just a few of the many products available to your clients. Want to learn more about the these products and how to help your clients find working capital? Join us for two educational webinars with Fundera Co-Founder, Andres Moran. Sign up at the links below:
Meredith Wood is the Editor-in-Chief at Fundera, an online marketplace for small business loansthat matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.