Alternatives to Traditional Business Loans
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UPDATED: Aug 7, 2012
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Both large and small businesses alike have weathered a huge blow from the recent economic crisis. Established entrepreneurs and business owners alike saw their life’s work crash before their eyes almost overnight. While experts called this crisis a “recession,” many others saw this as nothing short of a full-blown depression. For those businesses that have weathered this storm, many are finding the need for business financing in order to bridge their businesses from today’s market into tomorrow’s recovery.
But there’s just one problem: banks are keeping their coffers under wraps, not lending small business loans are freely as they once did in the past.
For the bloodied and bruised company owner though, this situation is unacceptable. While everybody can still test their luck and apply for business loans, there are alternatives to traditional lenders in the event an application is denied.
The Small Business Administration (SBA) is a government agency charged with the task of promoting the country’s small businesses. The SBA isn’t a lender per se, but instead it partners with established lenders to offer SBA-backed business loans.
SBA loans act much in the same way as typical business loans, but since they’re backed by the federal government, they come with less risk to the lender. As a result, SBA financing tends to be easier to qualify for.
However, the application process still requires substantial effort and information from an applicant.
Personal Business Loan
Maybe an entrepreneur needs only a few thousand dollars to get his idea up and running. In that case, a personal business loan may be a more appropriate venue for company financing.
The reason being: typical business loans are usually given out for $5,000 to $150,000. If a simple small purchase is all that’s required, it makes little sense to finance and pay interest on a massive amount of money like that.
Personal loans are available to any with a decent personal credit score, and tend to take less effort in the application process.
Merchant Cash Advances
But what’s an owner to do when their credit isn’t great and when one of those aforementioned sources won’t give them the financing they need?
Have you heard of payday loans? Imagine one of those personal short-term loans being used for a business and you’ll begin to understand how merchant cash advances work.
If a business sells products instead of services, merchant cash advances can be used to get a quick surge of cash with little effort. However, given the low-eligibility requirements, merchant cash advances tend to come with high fees—just like their payday counterparts.
The nice thing about this alternative to regular bank business loans is that merchant cash advances aren’t repaid in a traditional manner. Instead, lenders see a return on their money through every credit card transaction a borrower receives.
In practice, this occurs when a borrower sells a product to a client, and that client uses his or her credit card to pay for the purchase. Merchant cash advance lenders skim money off of that purchase and puts that money toward the repayment of their lent money.
While this type of financing can come at very high costs, it is an adequate and oft-used alternative to typical business loans.
Finally, if an entrepreneur doesn’t mind sharing his profits with others, he can seek out the financial backing of investors.
Have you seen ABC’s Shark Tank? These kinds of deals work much like those found on that show.
Investors are simply other people who have money that they are willing to put towards the start up or expansion of a business in return for equity in that business.
But if having somebody resembling Kevin O’Leary by your side doesn’t interest you, there are other sources of finding investors that are becoming more and more popular.
Crowdfunding websites, such as kickstarter, allow entrepreneurs to pitch their idea to the internet community and hope that the public finds the idea attractive enough to donate to.
The nicest part about crowdfunding is that the investors usually don’t seek any equity or stake in a company at all. Often times, the only compensation they receive is some sort of small gimmick offered and explained by the entrepreneur before any funds even come in.
Given the existence of these alternatives (and there are others out there too), there’s no reason to give up if your first business loan application is denied. Adapt and work around that small obstacle to see your dream come to life.