There are a few things small business owners need to know in order to determine whether or not the capital they’re receiving comes with the best terms.
The first thing to do is determine what the capital is needed for and what their business qualifies for.
If a bank loan isn’t in the cards, there are still options for financing available.
The non-bank commercial financing space is filled with businesses ready to lend capital to small business owners. However, there are considerations to make before accepting capital outside of the bank space. The four biggest things to consider when determining which small business financing offer is best are the interest rate, term length, repayment frequency, and any fees associated with the offer.
Interest Rate
The rate of interest offered varies from small business to small business. Financiers will weigh the risk a small business owner and their business carries when determining what interest rate to charge.
However, small business owners should know a little secret going in: unless considered an incredibly high-risk, the initial interest rate brought to the table is negotiable. It’s no surprise that lenders earn commission off the approval amount they can get small business owners to agree to. That commission has built in room to negotiate, if the rate needs to lower, in order to secure the small business owner as a client.
Outside of the sales aspect, lenders can reanalyze a client’s file upon request to confirm if there’s any decreased margin of error that may have been overlooked in the initial underwriting.
The world of non-bank commercial financing is a competitive place. By making it clear to the financier that you are considering other options as well, small business owners arm themselves with wiggle room in which they can negotiate better rates and terms.
Term Length
The term length of a loan is not as negotiable as interest rate. There is often variability, with term lengths ranging anywhere from 3 to 180 months. This term length represents the length of time in which a small business owner has to repay the loan.
In the non-bank funding world, longer term lengths often come with a higher interest rate when compared to a shorter term length. However, this can be a place of leverage that small business owners can use. When determining the term length, negotiate for as long a term length as can be managed.
In addition, see if an incentive for early repayment can be negotiated. Small business owners confident that they can repay before the end of the term will receive the best of both worlds.
This builds in a bit of safety net for any surprises that may affect the ability to pay off the loan, but still ensures you can receive the best rate possible if you can pay off the balance early.
Repayment Frequency
The repayment frequency of a loan represents how often a borrower will have to make payments back to the lender. These can fall on a daily, weekly, or monthly schedule. A monthly repayment structure comes with a higher credit score requirement, often 650 or higher.
Repayment frequency is one of the places with the least room for negotiation for a small business owner. Most non-bank commercial funders will have a fixed method of repayment frequency that they use and are generally unable to move from it for fear of affecting their risk parameters. Many commercial funders see a weekly or monthly payment as a higher risk because the payment is higher than if they miss a smaller daily payment.
Though most small business owners would prefer a monthly frequency, don’t turn down capital simply because it’s on a daily or weekly repayment frequency. Often, the knowledge that there is a steady repayment that can be counted upon in the weekly or daily frequency can give more peace of mind than the accidental surprise of a monthly payment.
Fees
Fees in the non-bank commercial funding space often work differently than they do with banks. There will often be a one-time origination or processing fee that is usually reasonable. Small business owners need to be vigilant when it comes to arming themselves for negotiation of fees.
Research what origination fees are in the market. This is another place where the competition within the non-bank commercial funding industry can work to a small business owner’s advantage.
If a funder comes to the table with a $5,000 origination fee, ask them to sharpen their pencil and run the numbers again. Another thing to watch for is a 3rd party agreement or large “success fee”. These are often written in simply to pad margin. If those fees are larger in the 5-10% range, it’s another place to negotiate or simply take your business elsewhere.
Next Steps
Need financing to grow your business? Looking to buy equipment and inventory or scale up your marketing efforts?
At Capital Collab, our Capital Advisors work with you to match the best financing options to your business need. With Capital Collab you will be assured that you are getting the best terms for your small business financing, including interest rate, term length, repayment frequency and fees.
Take the guesswork out of small business financing. Get started with a call to Capital Collab.
To determine if financing through Capital Collab is right for you and your business, click the button below to request a call from a Capital Advisor.
A quick 15 minute call with one of our Capital Advisors could set your business on the trajectory to reach your goals.
We have a 90%+ funding rate for our clients and funding typically occurs within a matter of days, not weeks or months.