After the 2007-2008 credit crisis, small business lending among traditional banks all but dried up. Although banks have become more active in recent years, only the most creditworthy and established companies are considered for financing. Even then, traditional lenders typically require some type of collateral, such as real estate or equipment, to secure the loan, which startups are unlikely to have. In 2015, traditional lenders approved less than 22% of small business applications. In the wake of the crisis, however, a number of non-bank lending sources have emerged that offer small businesses more access to financing than ever before, without having to put up collateral.
Non-bank online lender
Online lenders have proliferated since 2008 due to overwhelming demand for loans that remain unmet by traditional banks. The Internet has become a convenient source for small businesses looking for any type of financing, from seed capital and working capital loans to lines of credit and expansion loans. Businesses pay a little more for their financing needs, but the process is streamlined and funding is fast.
Credit lines: Kabbage Inc. Is one of the few online lenders that offers lines of credit to startup businesses. As the leader in online business lending, Kabbage offers business lines of credit worth up to $100,000 for small businesses with annual sales of at least $50,000 with at least one year of operating experience. It requires a 560 credit score for the business owner. Businesses can pull from their lines of credit at any time, with six to 12 months to repay the loan. As part of the application and qualification process, Kabbage requires that the business link its bank account or online accounting system to its platform. Funding can be approved in minutes and a line of credit established within a day.
Term Loans: A search of online lenders uncovers at least a dozen that cater to small businesses. OnDeck Capital Inc. (NYSE: ONDK ONDKON Deck Capital Inc5. 10-1. 92% Created with Highstock 4. 2. 6 ) is considered one of the leading online lenders for small businesses, offering fixed-rate loans between $5, 000 and $250, 000. OnDeck requires a minimum credit score of 500, one year of operation and annual sales of $100, 000. Loan terms can range from three to 24 months, with payments deducted from the business checking account daily or weekly.
Startup financing: for businesses in the early stages of startup, Accion offers financing of up to $100,000. Requirements include a minimum loan score of 575, sufficient cash flow and proof of income.Actual loan amounts and minimum requirements may vary by state. Accion is a nonprofit microfinance provider that specializes in small business development.
Peer-to-peer loans
Peer-to-peer (P2P) lending is the fastest growing segment of the online lending industry. A P2P lender creates a digital marketplace that brings borrowers and investors together. Borrowers are typically people or businesses unable to obtain loans through traditional methods. Investors are individuals or institutions looking for a better return on their money than traditional investments. Borrowers create a profile and pitch their cases to the marketplace of investors. Investors can choose from a portfolio of borrowers and invest as little as $25 per borrower. The P2P lender acts as an intermediary and screens and rates borrowers based on their creditworthiness and matches them with investors. Loan terms are typically short, between three and five years, and interest rates can range from 7% to 35%.
Prosper Marketplace Inc. and LendingClub Corporation (NYSE: LC LCLendingClub Corp5. 46-6. 67% Created with Highstock 4. 2. 6 ) are the two most established P2P lenders and both offer businesses with less than large loans. Prosper makes personal loans up to 35.000 $, which can be used for business purposes. Lending Club has a separate program for small businesses with a requirement that the business be at least two years old and have annual sales of at least 75.000 USD achieved. Business borrowers can borrow up to 300.000 $ with loan terms ranging from one to five years.
Small Business Administration Microloan
For businesses with poor or nonexistent credit histories, the Small Business Administration (SBA) has established a microloan program that offers loans between 500 and 35.000 US dollars offered. Bank lenders, typically nonprofit organizations that specialize in small business development. The loan application process is more streamlined and loan rates are reasonable at 10% to 15%. The SBA website has a list of micro-borrowers by region.