06/08/16

Short Term Loans Offer Additional Lending Options

Let’s face it, the cost of capital for big, profitable, mega-corporations is significantly less than what it is for small business owners seeking short term loans. In fairness to the bankers, small business owners carry a greater risk for lenders, fail at a higher rate than their larger colleagues, and don’t have the track record a large company has. Despite the fact that small business owners create the lion’s share of new jobs, about half of them are out of business in five years—not making risk-averse bankers too excited to stick their necks out.

Although there are some community bankers who take a different approach and don’t think this way, it’s not uncommon for bankers to expect the smallest of small business owners to use home equity or personal credit cards to finance their businesses. I’ve certainly leveraged the equity in my home on more than one occasion and I know of a number of small business owners who have walked the razor’s edge of financing business projects with personal credit cards.

When compared with the interest rates on most credit cards, the interest rates associated with a Merchant Cash Advance (MCA) or other short term loan product start to look more attractive. Particularly if you need the capital right away to take advantage of a special offer from a supplier or have less than perfect credit.

Over the last 15 or more years many banks that once offered small business loans have left the market. When added to the diminishing number of community banks, the lenders really motivated to offer to finance small businesses are alternative lenders that offer specialized products like MCA loans, factoring, franchise loans, equipment loans, and other similar loan products. The cost of capital for these lenders, combined with the risk profiles of the borrowers they serve, equates to higher interest rates than a traditional business loan at the bank. Most alternative lenders would suggest, and I wholeheartedly agree, if you have the ability and the time to get a traditional low-interest rate from the bank, that’s where you should go.

Unfortunately, it’s becoming more difficult for small business owners to obtain traditional business loans. Alternative lenders are also geared up to lend short terms loans many small business owners are looking for.

Get more small business tips from Lendio.

About the author

Tyler Heaps
Tyler is a member of the Lendio marketing team. He is passionate about digital marketing, small business, and helping small business owners succeed. Tyler is an outdoorsman and loves spending time with his family.

Comments

More like this