Finding capital for your company when the banks and other traditional lenders have all turned you down isn’t as tough as it was 10 years ago. There are a number of options to consider and what you decide to go with will depend heavily on your company’s current financial situation and future forecast.
Factors like credit worthiness, company assets, future earnings, inventory, your own personal assets and savings, and the amount of credit currently available to you are all important things to consider when deciding on what option to choose.
Alternative small business lending options
Here’s 8 common alternative lending options a small business should consider when the banks won’t touch you:
1. P2P Lending
P2P lending is hands down, one of the best methods for obtaining funds for your business. P2P companies match businesses with lenders and take a small fee for their troubles. Since these companies operate strictly online, they don’t have the overhead that traditional lenders do and thus won’t charge you the same high fees and interest.
There are many variations in terms of the P2P lenders you’ll deal with. Some P2P companies use accredited professional lenders, letting them compete for the requested loan in an “interest rate auction” to get your business. Other platforms use regular people to secure funds, allowing the lenders to lend whatever amount they choose.
2. Invoice Factoring
Invoice factoring is the perfect option for businesses with a lot of outstanding receivables. Most times, the balance between receivables and payables are what will make or break a business. Your creditors want their money and you need to get paid by your clients to make the payments.
Factoring companies essentially purchase your outstanding invoices, usually at around 80 percent of their total value. This takes the heat off your business, putting much needed funds into the company bank account. Factoring firms all have their own additional fees they charge including late payment fees if those indebted to you take longer than a set period to repay.
3. Inventory Financing
If you have lots of inventory that hasn’t been sold, that still holds value to the market, inventory financing is a great option for obtaining small business funds. There are several accredited lenders who deal in inventory financing loans.
The lender will loan you money based on your verifiable inventory, lending your business up to 80 percent of its value. They’ll of course require you pay a fee for the privilege, which will vary based on a number of factors. Be prepared to demonstrate accuracy in your inventory management, and also be prepared for the lender to stop by before and after the loan has made to ensure you’re on the up and up.
4. Retirement Fund Loans
You could just take out a portion of your 401k or other retirement plan savings early and pay a penalty. That’s the easiest way to go about it, but not the most financially savvy one. If you have retirement savings, getting a loan using those funds as collateral isn’t a bad option for obtaining much needed small business capital. You better be confident in your ability to repay if you go this route, though!
You will be double-taxed because Uncle Sam will tax both the withdrawn amount, and then further tax interest repaid on the loan (learn more here). This is the most common argument against this option. Also, keep in mind that you can blow your entire retirement fund if the money isn’t repaid.
5. Online Lending
Online lenders aren’t much different from banks in how they do their business. There are some options for small businesses including traditional loans, quick acceptance, high risk, and variable interest rates based on how fast you pay the money back.
While online loans are generally more expensive than the other small business lending options, small business owners may want to consider this type of loan because of the quick and easy approval process and different borrower evaluation criteria.
Typically, reputable online lenders will start reviewing your loan applications in just a few minutes. The whole loan application evaluation process itself only takes two hours or so, and the online lenders might approve borrowers whose applications were denied by banks because they evaluate small business owners differently from banks.
6. Hard Money Loans
Hard money loans are easier to get than many other types, if you have the kind of collateral that hard lenders are willing to accept. Most times, real estate or high-value equipment is preferred, but every lender has their own criteria they follow. The “quick sale” value of the property will be the number lenders will give you as the loan amount, meaning you’ll usually get 70 – 80 percent the appraised value, depending on what you offer them.
The SBA offers hard money loans, as do a number of online and offline private lenders and investor groups. Like most alternative lending options, hard money loans come with a great deal of risk. If you can’t pay the balance off quickly, you’ll lose whatever collateral you’ve signed away, which could mean lights out if you lose the real estate your restaurant or manufacturing facility is located on! Not to mention the 20 – 30% in extra value you’ll lose when the lender sells your property for the fully appraised value.
7. Credit Cards
This is a real “emergency only” option for financing your business. You’d better be equipped to pay the balance off on time, or at least be capable of floating the minimum monthly payments until your business becomes solvent again. Credit cards are ripe for abuse, especially if you’re using them to expand your business.
They’re most often used based on impulse rather than smart thinking. If you decide this is your only option, make sure you have a game plan to pay it back, such as pending orders being filled or the imminent sale of capital from the business (ie., high value, high demand equipment). Otherwise, you’re just making a hail Mary to save yourself from whatever financial woes are currently crippling your business.
8. Friends and Family
Not much to say about this one. Friends and family may be a viable option for you, provided everyone involved gets on the same page regarding payback terms, including any interest or equity they’ll gain in the business. This option may or may not be preferable to others, but keep in mind that money is most often the root of all evil when mixing business and pleasure (ie., your family and friends).
When deciding on what option is best for your business, make sure to research the lender, their terms and what their closest competitors are offering before agreeing to anything. Always read the fine print and make sure to weigh all the positives and negatives of each before making a final decision.
Everyone needs some extra money to get by now and then. There’s no shame in that. However, you don’t want to do more harm than good, and be forced to close the doors in month or two because you made a final choice based on desperation instead of prudence.