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What You Need to Know About Small Business Lending in 2023

Capital is the lifeblood of any business, but more so for small businesses. Without sufficient capital, most entrepreneurs struggle to scale their existing operations or start new ventures. In fact, many small businesses fail because they run out of capital. In such a cash-strapped environment where ready capital is hard to come by, professional lenders are primed to make a killing. But that’s easier said than done. Understanding the types of small business lending solutions available to you is the first step in creating a lending program worth its weight in gold. Below are your top options:

1. Term Loans

With this type of lending solution, you allow small businesses to borrow a fixed amount of money upfront and pay it back over a specified period. You get to define the interest rate, but it generally shouldn’t surpass the industry standard. You’ll loan out the amount in one lump sum, so if your cash buffer isn’t large enough, you might look for alternative options. 

To protect yourself from prospective defaulters, put in place stringent requirements from the get-go. It would also be best to include in the loan agreement that the business borrower retains its current liquidity ratio, avoid going above a set debt ratio amount, and generally go slow on acquiring long-term tangible property. 

2. Lines of Credit


Also called a credit line, this type of lending allows you to set aside a designated amount of money from which small businesses can draw if and when needed. It works pretty much like a credit card in that you cannot charge interest on what borrowers haven’t used. Lines of credit tend to have lower interest rates than credit cards and personal loans, so don’t expect quick returns with this option.

The good news is you can decide how much money you want to make available for a borrower depending on their credit rating, income, and outstanding debts. There’s also the option of offering secured lines of credit, which may not attract as many borrowers. Very few people are willing to place their home or inventory as collateral.

3. Cash Advance

A short-term loan, a cash advance, allows you to serve cash borrowers through their credit card company. There’s no checking or verifying the borrower’s credit score, as the money being borrowed comes straight from their credit card account.  

This type of lending is common among borrowers with liquidity issues. As such, they provide a perfect opportunity to charge fees and earn solid interest. You give out money fast, but that comes at a cost for the borrower. Besides, you can position the loan package to earn interest from the moment a borrower activates it.

4. Embedded Lending

Let’s face it — none of the above lending solutions provide visibility into how a business is performing right now. You can only use things like recent tax returns and credit scores to power your underwriting criteria. That’s pretty risky because of one simple fact: small businesses are incredibly volatile and can close down anytime, leaving you with huge losses. Embedded lending accounts for this inconvenience. 

You can run an effective and risk-proof merchant platform lending program using an embedded lending technology platform. All you need to do is ’embed’ the software into your business customers’ POS systems, and you’re good to go. You’ll then be able to tap into real-time business insights, such as cash flow, to know which banking products to extend. Best of all, embedded lending is secure and has repayments baked in.

For instance, with a platform such as LendingFront, you can automatically send one or more credit offers and allow the merchant to adjust the amount and the term within the parameters you set; and that’s just one perk out of many.

Small Business Lending Will Take on a Different Face in 2023

If you have faithfully plowed through the above information, then congrats — small business lending won’t be giving you sleepless nights anymore. One final thing to remember is that SMB borrowers are evolving with time, and they’re now more tech savvy and knowledgeable than ever. A lending solution that will please them in 2023 is one that is customer-centric, secure, low risk, and facilitates seamless repayments.

small business coach