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Updated on Tuesday, January 22, 2019
When a new or established business needs to build a new headquarters, or make any number of other capital expenditures so it can grow as a business, it may use a loan from a commercial finance company.
These loans are typically short-term sources of funding addressing an immediate need; however, some businesses keep open an ongoing line of credit to dip into at busy times.
What types of loans do commercial finance companies offer?
- SBA loans: U.S. Small Business Administration-guaranteed loans provide options for borrowers who may have good credit, but don’t qualify for a bank loan. Banks are more likely to approve these loans because they’re less risky, since they are guaranteed by the SBA. There are several types of SBA loans, including the popular 7(a) program, the 504/CDC program for commercial real estate, as well as microloans, which are smaller amounts ($50,000 and under) that can be extended to borrowers with less-than-stellar credit. The SBA also guarantees export loans, lines of credit and disaster loans.
- Term loans: Traditional term loans refer to long- or medium-term loans that are paid back over the agreed-upon timespan plus interest. As commercial loans, they are best for businesses with very good credit that need to fund equipment or real estate purchases.
- Short-term loans: When businesses need cash fast, and for businesses without great credit, short-term loans can provide it, sometimes with same-day approval. The tradeoff is that the rates are higher than with long- or medium- term loans. Short-term loans must be repaid within three to 18 months.
- Lines of credit: A business line of credit works like a credit card: it’s revolving credit, allowing a business to borrow up to a certain amount, but interest is only charged on the amount used. Once that amount is repaid, you can borrow up to the limit again automatically, with no need to reapply. This makes it an option for businesses that experience seasonal surges in orders. With lines of credit, loan amounts and rates both vary greatly.
- Equipment financing: Equipment loans are used when a business needs to make a major equipment purchase, such as for heavy construction machinery, trucks and other expensive equipment. In some cases, the purchased equipment stands as the collateral, so your other assets are not at risk.
- Invoice financing: Also known as accounts receivable financing, this loan allows financing companies to advance cash with your outstanding invoices as collateral. It often costs more than traditional financing.
- Merchant Cash Advances (MCAs): The MCA is an unsecured offer of cash in exchange for either a percentage of future sales, or else you repay it with daily or weekly bank account debits. It’s available to companies that have been in business for at least five months, with more than $75,000 in annual revenue. While businesses with credit scores as low as 400 can qualify, the steep fees associated with this should make any small business think twice — APRs can be in the triple digits.
Banks vs. alternative lenders
Banks, considered traditional lenders, are known entities, and because they are often massive corporate institutions, they offer a host other financial services in the same integrated ecosystem. Based on our research of top banks around the country, Banks generally have the best rates, but they are the most discriminating in who they approve for loans. For the small businesses that do qualify, the application process can still be formal, bogged down in paperwork and slow.
Online lenders open up many funding options for borrowers with less favorable profiles, like lower credit scores or bad credit. Plus, they usually have informal, accelerated application processes with little or even no paperwork. The tradeoff for the flexibility, convenience and leniency is higher interest rates.
Best commercial finance companies for each loan type
Funding Circle has some of the lowest rates for business term loans of $25,000 to $500,000, ranging from 4.99% to 24.90%. Loans are for one to five years with fixed payments and no prepayment penalties. To get these rates, Funding Circle requires a credit score of at least 620 and your business has to have been active more than two years, with no revenue minimum.
The Business Backer offers term loans of $5,000 to $200,000 for one to four years, with interest rates starting at 1.70%. The streamlined process begins by filling out an application on The Business Backer and providing four months’ worth of bank statements, and funds may be in your account within 48 hours.
Loan Builder, which is owned by PayPal, has fixed-fee pricing ranging from an impressive 6.49% to 49.99%, with no origination or early repayment fees. LoanBuilder loans are $5,000 to $500,000 and must be repaid in terms ranging from 13 to 52 weeks. Businesses must have at least nine months under their belts and $42,000 in annual revenue.
Fora Financial offers small businesses working capital from $5,000 to $500,000 on terms of up to 15 months. Using Fora Financial’s one-page application and some bank statements, you can get approved in as soon as 24 hours, and approval is not based entirely on your credit. Also, not only does it not charge a fee for early payment, Fora Financial also has early payment discounts.
Lines of credit
Kabbage offers small businesses short-term loans of up to $250,000 for 6 to 18 months, once you draw from the line. Kabbage works on a monthly fee basis (and no prepayment fees). There’s no minimum credit score to apply. Small businesses can apply online or on the Kabbage app, and the app makes it simple to transfer money into your business’ account when the need arises.
Rapid Finance extends lines of credit of up to $500,000 to small businesses for any purpose, whether it’s to get through slow periods or keep up with rapid growth, and approval is not based on your credit alone. Rapid Finance also offers loans.
Direct Capital helps businesses buy equipment costing up to $500,000 (if application only) or up to $1 million (if providing financials), and repay it monthly over six to 72 months, with rates starting at 5.49% up to 24.90%. Applicants to Direct Capital should have at least two years in business and bring in $150,000 in revenue annually, with a credit score of 620 or above.
National Funding offers equipment funding of up to $150,000 as well as equipment leasing. Applicants must have a credit score of 620 or higher and have been doing business at least six months. National Funding offers deferred payment options, allowing business owners to pay seasonally or quarterly or even skip payments.
See our top picks for equipment financing companies.
Paragon Financial Group offers advances up to 90 percent on accounts receivable, from $25,000 to an impressive $10 million, on the day the work is completed. Paragon rates vary, but can be 1.25 to 2% per 30 days, with an origination fee, and the rate paid includes credit protection and accounts receivable management services. Businesses will need an annual revenue of at least $300,000 to qualify.
BlueVine is a fast option (10-minute application, 24-hour funding) for small businesses looking to factor $5,000 to $250,000 in invoices monthly, with 85 to 90 percent of the invoice amount advanced. The discount rate starts at a low 1% per month. BlueVine requires a minimum credit score of 530 for its invoice factoring service.
Merchant cash advances
CAN Capital offers merchant cash advances of $2,500 to $250,000 with payments on variable daily amounts and a $395 administration fee. CAN Capital’s factor rates can have a range of 1.15% to 1.48%. The preferred minimum amount of time in business for applicants is 12 months, and a minimum 600 credit score, or 550 if they have six or more years in business.
Credibly offers MCAs of up to $400,000 with factor rates as low as 1.09% and terms of three to 18 months to businesses with credit scores of 500 and up, with six months in business. To qualify for a Credibly MCA, businesses must also have an average of $15,000 or more in monthly bank deposits. There is an underwriting fee of 0.00% - 2.50% of the total advance amount.
The bottom line
For businesses needing an influx of funds, the commercial finance company marketplace is full of choices, and it’s easy to compare them all online. Do enough preparation and research and the right loan should emerge from the pack.