You've gone all in for your business – quit your day job, emptied your savings, and hustled hard. Now it's time to take your business to the next level. You need capital – and fast – so where do you look?
If you're like many small-business owners, you probably try to get financing through a bank. However, banks are usually wary about lending to small-business owners because they typically don't have the financial solvency of bigger businesses. And if you're trying to start a business, your options are even slimmer – most banks won't finance startups point blank.
This precarious funding horizon prompts many small-business owners to seek alternative funding options, but not all are viable solutions. For example, the Asheville Citizen-Times reports on the woes of Jason Curtis, a furniture business owner, after he accepted a loan from the online lending company OnDeck.
The Citizen-Times states Curtis ran into trouble when he had to pay $255 each day on the $25,000 loan he took from OnDeck. Unsurprisingly, that daily payment took its toll on his cash flow. It wasn't until he refinanced the loan that he finally got a little breathing room.
His experience may be a fluke, but the long-term ramifications of these loans may be more than the cash-strapped borrower realized at the time. For example…
- The interest rates may be staggering.
- The high payments may force borrowers to take out additional loans just to keep up.
- Federal regulations may not apply to these banking alternatives.
Let's explore safer lending options that can help you raise capital and maintain financial stability so you can expand your business or get it up and running.
6 Lending Alternatives for Small Businesses
When you need money, enough rejections from traditional institutions may drive you to seek out fast fixes with an unanticipated price tag. Before losing hope, check out these other forms of financing:
- Factoring. This is a short-term solution that may be viable if you are going through a period of serious growth and need cash on hand. It's not a loan, but rather, the sale of an asset – specifically, an invoice. You can learn more about this option in Entrepreneur's Small Business Encyclopedia.
- Peer-to-peer lending. This type of loan allows you to borrow money from a group of peers (i.e., people who aren't related to you). The investors get a chance to earn interest on the loan, which you can use to offset debts or help pay for new gear. However, the interest rates are usually higher, so tread carefully and do the math. You can read more about peer-to-peer lending in this article by Investopedia.
- Crowdfunding. This is less like peer-to-peer lending than it is like fundraising. You have to build a campaign, usually through an online site like Kickstarter, and backers pledge an amount to give in exchange for rewards or perks. You don't have to pay interest on the funds you raise. Learn more about crowdfunding in our posts "Small Business Spotlight: Crowdfunding with Peggy Jean's Pies" and "The Funding Option 98% of Small Businesses Haven't Tried."
- Borrowing from friends & family. We know – asking your family and friends for help may pull you way outside of your comfort zone. At the same time, if all your friends and family kick in a little money, you may reach your goal faster than you think. Plus, repayment may be more flexible with people you know.
- Applying for a SBA loan. Earlier this year, the Small Business Administration rolled out LINC (Leveraging Information and Networks to access Capital) to help small businesses get loans online from approved lenders. The program aims to quickly match borrowers to potential lenders, which saves small-business owners the agony of waiting for weeks to hear back about a loan. Learn more about the program in the post "SBA's LINC Connects Small Businesses with Potential Lenders."
- Applying for a credit card. If you only need a small loan, a credit card may be your best way to get some working capital without fussing with loan paperwork. Plus, a credit card has fewer restrictions on how the money can be used. However, mind the interest rates – letting a high balance roll over from month to month may do your financial health harm.
For more information about small business borrowing trends, read our post "7.5-Year High for Small Business Borrowing Bodes Well for Economy."