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Decades ago all across America, small business owners in looking to find local business loans would perform the same, familiar ritual. Plumbers, real estate developers, restaurant owners, and more would all get dressed up to go to a local community bank, heave manila folders bursting with financial paperwork, and hope a loan officer would approve their request for business financing.
Now, with wider access to capital through a new, digitized path to small business financing, many business owners never speak to local bankers—or look for local business loans at all. But if you’re wondering how to find local small business loans, the truth is that although these opportunities do exist, they are few and far between.
That said, there are still plenty of financing options available to small business owners. We’ll look at the most promising local business loans as well as non-local financing options that might be a great fit to help you finance your business.
Bank loans are undoubtedly the best small business loan product available for any borrower. They carry the lowest interest rates and the best repayment terms on the market, so business owners that are qualified for local business loans from a traditional bank are almost always best served by this option.
The catch? Actually qualifying for these local business loans is difficult. Since most local community banks don’t have ample funds to loan out, they end up needing to keep qualification standards for their borrowers incredibly stringent.
If you’re intent on pursuing a local business loan from your brick-and mortar-community bank, your best choice is to consult with local banks directly about their application process and standards. Before you take this path, however, it’s important to acknowledge the headwinds you’ll face. Each local bank will have their own requirements, but you should expect them to look for candidates with excellent credit scores, very strong revenue and consistent positive cash flow, plus a solid history of time in business.
Given the challenges many borrowers face trying to both find and qualify for local business loans from banks, you might want to expand your search slightly—or at least consider a few other angles in. But you’re not out of luck.
The US Small Business Administration (SBA) has stepped in to recognize this challenge within local community lending and provide an alternative that makes local business loans more accessible to main street entrepreneurs.
Created in 2011 with a commitment to providing financing for underserved communities, the SBA’s Community Advantage Loan Program, a division of the widely popular 7(a) loan program, allows local, community-based lenders to offer financing to local borrowers by backing those loans with a federal guarantee.
The SBA Community Advantage loan is a small business term loan of $50,000 to $250,000 with affordable interest rates—usually between 7% and 9%—and payback timelines stretching up to 10 years.
With a percentage of the loan guaranteed by the federal government, approved community-based lenders can marginally relax the high standards set by traditional banks. This lowered risk allows them to take into account a wider array of factors as they consider which loan applications to approve. As a result, the same bank that may reject your direct application for a local business loan might be able to approve your funding request if it were submitted as an SBA loan application.
Before applying for an SBA 7(a) or Community Advantage loan, you must first confirm that you meet the requirements of the program.
To qualify, you must operate a for-profit small business—meaning you have fewer than 500 employees and less than $15 million in assets. Both new startups and established small businesses are welcome to apply, however, note that certain industries are ineligible for the program (like gambling or religious organizations, for instance) due to government restrictions.
Like other local small business loans, both the SBA and your local lender will evaluate applications on the basis of commonly held lending standards, such as your credit score, your business’s annual revenue, and other debts that your business currently has outstanding. You’ll also need to present a picture of your experience in your industry, as well as a business plan. And, although there’s no formal credit score requirement, many business owners who qualify for SBA loans have strong credit profiles.
Although the community advantage program is a welcome alternative for entrepreneurs seeking local business loans, this isn’t the best funding option for every business. Let’s take a look at the benefits and the drawbacks of applying for an SBA loan:
Given these pros and cons, only you can decide whether pursuing the SBA loan application process is the right choice for your business. As you weigh your options, be sure to take into account both the short-term and the long-term needs of your small business.
If you determine that an SBA community advantage loan—or any other SBA loan option—is the right choice for your business, you’ll start the process by identifying an SBA-approved community advantage lender in your area. You can find SBA intermediary lenders through the administration’s LenderMatch portal, or by consulting with a financing counselor at your district or regional SBA office.
Once you’ve identified an appropriate SBA intermediary lender to work with in your area, you’ll want to consult with that lender directly for further application steps, as exact requirements can vary among lenders.
That said, you can expect to include these documents with your application:
Compared to other forms of financing, SBA loans have a time-consuming and difficult application process—so it’s not a great option for those who need quick access to funds. If you decide to pursue this option, make sure you set aside adequate time in your business planning to accurately complete the application, be available for any follow-up requests, and await the funding your business needs.
We’ve established that the traditional model of local small business borrowing is, for the most part, a thing of the past. For most borrowers, obtaining local small business loans is almost universally a time consuming process. And, for some, altogether a non-option.
Fortunately, as traditional banks have moved away from small business lending, a new marketplace of online lenders have stepped up to fill the gap in small business financing. Consider these non-local business loan products as potential alternatives to the local business loan you had in mind.
Business owners seeking the stability of a traditional bank loan with simpler qualification standards will likely be most attracted to term loan products from online alternative lenders.
Just as with a traditional bank loan, these are medium-to-long term loans offered as a lump sum of cash upfront, then repaid over a period of 1 to 5 years through fixed monthly payments. Your interest rate will depend on your qualifications, including your creditworthiness and business financials. The rates won’t be as favorable as you might find with local business loans from brick-and-mortar banks, but qualification standards aren’t as rigorous—but many business owners find the trade off worth it in order to gain access to capital.
Also unlike with local business loans from banks or SBA loans, you can complete an application and have funds in hand in as few as a couple of business days.
Although the traditional term loan model tends to be the most familiar to borrowers, it’s not the only way—or, in many cases, the best way—to obtain business funding.
Particularly if your business doesn’t need access to a large sum of funds all at once, a business line of credit, which gives borrowers access to a maximum amount of capital from which they can draw funds as needed, may be a better option.
The business line of credit works similarly to a business credit card cash advance in that your lender will authorize a set amount of funds—aka maximum credit line—that you can draw funds from as expenses arise within your business. You only pay interest on the funds in use at any given time, and once you repay what you’ve withdrawn, the funds can be used again and again as needed. The funds can be used for virtually any business purpose, and as long as you make repayments on time and don’t exceed your credit limit, you won’t incur increased interest rates.
These are also a good option for business owners who are looking for faster access to capital and less stringent qualification requirements than local business loans.
Though interest rates on business lines of credit tend to be slightly higher than equivalent term loan rates for most borrowers, keep in mind that because you only pay interest on funds when they are actually in use, many borrowers find that they can pay less in total interest on a business line of credit even with a slightly higher interest rate.
Business credit cards seem like a far cry from local business loans, sure. But in many cases, entrepreneurs who need a smaller sum of funds to get started can find just what they need in the right card.
Many borrowers are surprised to learn of business credit card options that offer as much as 12 or even 15 months of 0% APR. That means that, during this period, you can spend on this card interest-free—it’s like a free-money loan, essentially.
The downside, of course, is that these introductory offers do have an end date, upon which interest rates return to variable APRs based on the market Prime Rate and your creditworthiness. (Translation: They can be high—higher than a business loan.) Before choosing a business credit card for your financing needs, you should have a plan in place ensuring that you can fully pay off your balance before the cost of borrowing becomes unaffordable.
Browse the Best 0% Intro APR Cards
What you should take away from this is that you do still have options to find local business loans, although the era of getting preferential treatment through personal relationships with community bankers may be mostly a thing of the past. Bottom line is getting a bank loan is hard—and you need to have strong credentials. But if you have them, you should apply—and there’s a chance you’ll be able to snag a local business loan, which could be a boon for your business.
If that doesn’t sound quite like you, don’t fret: There’s still reason to be optimistic about your options for business financing. Although process may not match what you’ve previously imagined, your options for small business funding through non-traditional lenders is actually much better than what was available even a decade ago.
Do your research, and stay open minded about alternative financing options for your business. With these steps, you’ll be well positioned to find the business loan you need for your next stage of entrepreneurship.