When it comes to choosing the right small business loan, factors such as loan total, interest rate, and repayment amount are obviously important.
However, there’s another number that’s extremely important, because it will ultimately determine both your capital position (i.e. how much cash you have/need), and how much your small business loan will cost: term.
Now, in a perfect world, common small business loan terms would be reasonable and standard. However, things aren’t perfect, and as such small business loan terms can vary wildly – and they can also be astonishingly unreasonable, to the point of being punitive.
Generally speaking, below are some common business loan terms that will help guide your research and due diligence:
Bank loans typically range from 3 years on the lower end, to 10 years on the upper end. The reason for the relatively long period is because most banks want to underwrite larger loans of $500,000 and above – and the longer period makes this more viable.
Not surprisingly, this leaves many small business owners on the outside looking in. And those that have less than 2 years of established business credit, or who don’t have a great business and personal credit score, have virtually no chance of getting a bank loan.
Small Business Administration (SBA) loans, which are facilitated in conjunction with certain banks, have terms that are even longer than bank loans and can range from 5 years on the low end, to 25 years on the high end.
Unlike banks, the term length here is not designed to squeeze out small business borrowers. Rather, it’s to give them a longer time horizon to pay their loan back, thus making it more financially viable. That’s the good news.
The bad news, is that competition for SBA loans is fierce, and the application process is excessively long. It is not uncommon for some applicants to spend more than 6 months communication with various loan officers, submitting and re-submitting a range of documents (e.g. business plans, resumes, financial statements, credit scores, etc.).
Because of this prolonged application period and the paperwork burden, many small business owners don’t bother applying for SBA loans. It’s not worth their valuable time, and they can’t wait half a year or longer to (possibly) get funds. The expense they need to cover or the opportunity they want to seize is of the ASAP variety.
Purchase Order Financing
Purchase order financing is when a small business essentially sells a purchase order to a lender, in return for cash – usually 80 percent of the total. The lender collects payment directly from the customer, and remits any overage (i.e. any cash left over after recovering the principal, interest and any other fees) to the small business.
Unlike bank loans and especially SBA loans, purchase order financing can be put in place relatively quickly (provided of course that there is an open purchase order that can be sold to a lender). However, the term is usually short – typically 60 or 90 days. And as noted above, the lender takes out all of the principal plus interest from the payment received.
For this reason, many small business owners steer clear of purchase order financing. They wisely don’t like the prospect of possibly having to raise capital again in 60-90 days.
We’ve written about peer-to-peer lending a few times, and frankly speaking, we’re not fans of this approach from a small business lending perspective. Yes, it’s sexy and exciting and makes the cover of Inc. or Business Week from time to time, but for every amazing peer-to-peer lending success story, there are thousands of funding campaigns that fail to get off the ground.
Frankly, failure rates are SO high – i.e. small business owners never reach their funding goal – that we can’t even provide a common loan term. For some it’ll be 90 days. For others it’ll be half a year or a year, and others will have longer. It all depends on the tolerance of lenders and what they demand.
Working Capital Loans
Working capital loans, such as the ones we offer at Mulligan Funding, have terms that range from 3 months to (in some cases) a year. Most of them fall somewhere in the middle, which is the “small business loan sweet spot” – i.e. the ideal duration that gives small business owners the time they need to pay back their loan, while minimizing their interest costs.
What’s more, unlike banks, we proudly support small business owners, and have much higher approval rates. Our streamlined application process takes minutes to complete, and upon approval we deposit funds in our clients’ accounts within days (compared to 2-3 months with banks, more than half a year with SBA loans, and who knows when with peer-to-peer loans).
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!