Most small business owners tend to focus exclusively on business loan types. They focus on interest rates, loan structure, and fees, but neglect to consider the type of lender behind each loan type. To be sure, rates, fees, and loan structure matter, but so does the type of lender that you select. For example, while online lenders and traditional banks both offer loans, their funding and application processes are completely different. In many cases, it can be challenging to qualify for traditional bank loans. Two popular types of lenders worth considering are SBA Preferred Lenders and alternative financing lenders. Both can help you grow your business. Each has its benefits and drawbacks. To help you determine which lender might be a better fit for you, we’ll compare SBA Preferred Lenders vs. alternative financing lenders. To ensure we start on the same page, though, we’ll quickly review what alternative financing lenders and preferred lenders are.
What is an SBA Preferred Lender?To offer SBA loans, a bank or credit union must get certified with the SBA. Once they’ve been certified, an SBA lender can earn Preferred Lender status. To do so, they need to establish a successful track record of processing and servicing many SBA loans. Once the SBA lender has built a track record, they can be granted Preferred Lender status. That upgraded status enables the lender to conduct loan approvals in-house and streamline SBA approval. In short, the Preferred Lender status allows the lender to process and approve loans much quicker than a standard SBA lender.
What is an Alternative Financing Lender?Sometimes called small business lenders, alternative financing lenders are financial institutions that provide small businesses with financing options such as:
- Accounts receivable financing
- Online term loans
- Merchant cash advances
- Equipment loans
- Bridge financing
- Invoice factoring
- Business lines of credit
SBA Preferred Lenders vs. Alternative Financing LendersIn the sections below, you can read about key differences between SBA Preferred and Alternative Financing lenders.
Application and Funding ProcessesIn terms of funding time, SBA Preferred Lenders hold a significant advantage over non-preferred SBA lenders. However, preferred lenders rarely come close to the speed of funding you’ll experience with an alternative lender. According to NerdWallet, Citizens Bank, a preferred lender, approves and closes SBA loans in about 45 days. Many alternative financing lenders can approve and close loans in a matter of days. Of course, how fast an alternative lender approves and funds your loan also depends on the type of financing. Working capital options such as merchant cash advances can be funded in 24 hours while term loans can take several days or weeks to fund. Also, alternative lenders can offer financing to borrowers who’d have trouble qualifying with a preferred lender. Preferred lenders typically require a credit score of at least 600, while many alternative lenders do not. Plus, alternative lenders can offer certain types of financing, such as invoice factoring, that don’t rely heavily on credit scores.
Customer ServiceSBA Preferred Lenders earn their preferred status only after they’ve successfully serviced many loans. This vetting process should increase the chance that you’ll experience satisfactory customer service with a preferred lender. Alternative lenders, on the other hand, aren’t vetted by a central authority. That doesn’t mean alternative lenders provide worse service, but they do have a wider range of customer service competencies. The customer service advantage alternative lenders do have is greater flexibility in their offerings. Since they’re not beholden to strict regulations like a preferred lender, alternative lenders can more easily customize their offerings to your needs.
Loan OptionsAs you might imagine, SBA Preferred Lenders can only offer SBA loans. While there is a decent variety of SBA loan programs, you’ll find far more options from alternative lenders. SBA programs offer two financing structures: term loans and lines of credit. The only variations are in who the loans and credit lines are designed for. Alternative lenders offer term loans and credit lines plus other financing options not offered by preferred lenders, such as:
- Merchant cash advances
- Invoice financing
- Equipment financing
- Professional practice loans
- Bridge financing
- Inventory financing
- Purchase order loans
- Online loans and credit lines
Cost and Repayment TermsBecause they’re backed by a government guarantee, SBA Preferred Lenders can offer very favorable terms. So in most cases, a preferred lender will provide more competitive rates than an alternative lender. Of course, the gross cost of financing isn’t everything; timing also matters. Unlike preferred lenders, alternative lenders offer financing options with more flexible payment terms. For example, merchant cash advances—which only alternative lenders can offer—are remitted based on your credit or debit card sales. This means the speed with which you pay back your debt will depend on your business's sales. So while you may pay a higher rate for an MCA vs. an SBA loan, the cash flow impact may be more manageable.
What’s the Right Option for Your Business?Assuming you want a credit line or a term loan, you should consider an SBA Preferred Lender if you meet all these criteria:
- Have good credit.
- Own significant equity in your business.
- Can wait at least 90 days to assemble your application, submit it, and wait for approval.
- Employ fewer than 500 employees
- Generate less than $7.5 million revenue on average each year for the past three years.
- Already tried and failed to get funds from other lenders or investors.