3 Ways to Finance Your Small Business in a High-Rate Environment

By Anna Serio-Ali

Entrepreneurs are feeling the squeeze now more than ever. While it may have become easier to fill job vacancies over the past few months, the job market remains stubbornly tight — despite the Federal Reserve’s best efforts. And with rising interest rates, it’s harder today to qualify for low-cost business financing.

That’s because banks respond to high interest rates by not only upping the rates they charge small businesses, but also tightening credit requirements. This means that new firms and business owners with less-than-perfect credit can have an especially hard time qualifying for a bank loan, let alone landing a low rate.

It’s a perfect storm: Business owners have fewer financing options than they did a year ago while also dealing with a resource crunch that limits the time they have to hunt for a lender. If you’re one of the many small businesses that need funds to keep the lights on, you might need to get a little creative.

1. Consider a no-doc lender when you don’t have time for a bank

Bank loans can take weeks or even months to process — time many entrepreneurs simply don’t have. However, a growing group of fintech lenders like BlueVine offer financing in a matter of minutes without requiring documentation. These companies work by connecting to your business’s bank and accounting software, rather than asking to see the usual profit-and-loss statements, tax returns and other financial records.

None of these lenders is a true no-document loan, because you still need to sign a contract. But the streamlined application significantly cuts down on the time spent getting financing, so you can get back to focusing on what you do best. These loans are often available to businesses that have been around for less than five years and are owners with credit scores in the 600s.

The main downside of no-doc loans is that they are more expensive than a bank loan. Rates from some lenders can top a 100% APR, which tells you the cost of interest and fees that you’ll pay over one year.

What’s more is that lenders often mask the high cost by advertising monthly interest rates or quoting fixed fees, rather than the APR. Always ask for the APR before you sign your contract — it’s the easiest way to make an apples-to-apples comparison between business lenders. And consider prequalifying with a few lenders to compare the APRs available to you.

Also watch out for frequent payments. While traditional bank loans only require monthly payments, many no-doc lenders require weekly or even daily payments. Small business owners often find this inflexible, because you risk missing a payment if your business has a bad week or even a bad day.

2. Lean on a business loan marketplace to find the right lender

Business loan marketplaces act as a sort of one-stop shop for small business financing. They partner with banks, fintechs and other lenders, so that you can get quotes from multiple providers by filling out a quick online form. Marketplaces can be a useful resource for business owners looking to get a sense of what’s out there, especially those new to financing.

But the nature of business loan marketplaces requires you to share your information with a wide range of lenders. Lenders may continue to call, email and mail you promotional materials even after you’ve signed a loan contract.

3. Shell out for SBA loan packaging

Small Business Administration (SBA) loans are designed to offer low-cost financing to small businesses that can’t get a bank loan, but they require more documentation than any other lender and can take months to apply for, let alone funds.

An SBA loan packaging service will do the work for you, cutting down the time you need to spend on the application. Companies like SmartBiz offer packaging services in addition to helping you find the right SBA lender. These services aren’t free, but given the low cost of these guaranteed loans, it may be less expensive than a no-doc lender.

Bottom line

Small businesses have always had a hard time qualifying for small business financing. But the current market conditions mean that entrepreneurs need to get creative with where they get their funding. In some cases, the cost of debt financing may be too high to be worthwhile. In that case, other financing options like crowdfunding or bringing on equity investors may be the way to go.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.