A Practical Comparison of Lending Options

By Krista Tuomi, Associate Professor, American University

Entrepreneurs often explore a range of funding sources to expand and/or finance working capital, including ‘alternative’ ones such as peer-to-peer (P2P) lending and invoice financing.  These have recently been enjoying media exposure, sometimes erroneously grouped in the same category as angels.  As with my previous blog post on bank loans, this table is supposed to give a rough idea of the advantages and disadvantages of each source.  Such information is useful when advising a firm, or considering investing in one which has already tapped this pool of money (and probably is paying dearly for it).

What should stand out for angels and entrepreneurs is that debt financing for very early-stage companies, when available at all, is extremely expensive.  One more consideration are possible fees or charges that are often very difficult to calculate and may include penalties for early repayment of notes.


Average Rate



SBA Guaranteed Loans


lower interest rates and longer payback periods than traditional bank loans

requires personal guarantee, slow processing time unless an express service is used (but then loan amount capped at $350,000), requires borrower to have invested equity and personal assets prior to loan request

Traditional Bank Loans (real-estate backed)


low interest rate

require substantial payment history and often rely on FICO,  bureaucratic application process and long processing times, low approval rate

Traditional bank loans (non-secured)


fairly low interest rates

all of above and requires personal guarantee

Personal Credit Cards


easy application, some have reward programs

annual fees, need to keep very careful records in order to deduct tax payments, variable APRs, easy to accumulate debt and/or damage credit score

Business Credit Cards

16 – 29%

offer higher credit lines than personal credit cards, shield personal FICO scores

annual fees, variable APRs, easy to accumulate debt and/or damage credit score

Peer2Peer Loans

14 - 29%

fixed rates, often simple online application, often no pre-payment penalty

high rates, can be difficult to get full loan request with mediocre credit score, financial data is made public

Invoice Financing (converts outstanding invoices into immediate working capital, eg. blue vine, fundbox)


flexible, quick and easier to qualify

high rates, hidden fees, some firms contact clients directly

Alternative Merchant Financing (Paypal Working Capital, Kabbage)


15-30% (Paypal WC)

very quick approval

often cheaper than traditional merchant cash advances

high rates, often require a minimum amount of steady sales to qualify

Traditional Merchant Cash Advances (where a business sells future credit card receivables in exchange for a lump sum payment)


high approval rates (~50%), quick approval, limited documentation needed, no personal liability, no liability if business interrupted and there are no credit card receipts

highest rates