Business Loan Alternatives
Need a business loan? Getting a business loan has become more of a challenge now that banks have shied away from business loans, especially startup business loans.
Small business finance is has been notoriously tough to obtain because of the Wall Street crisis that led to banks cutting back on their lending. The entrepreneurial spirit seemed to have given up the ghost, not because there was a lack of visionaries wanting to start a business but because there is no finance to support start-up initiatives. More....
We took a look at 8 alternative business loans sources, starting with: Pros: The ordinary people’s bank has never lost its common touch. Having an account at a credit union means you effectively own a part of the institution and therefore you tend to get treated with the respect that may be lacking across the street. Knowing this makes your appeal for a business loan a lot less intimidating. Cons: Credit unions have a reputation for being fair lenders, but in actual fact their interest rates do vary considerably. It can also be argued that a credit union is likely to be just as cautious as a bank when it comes to lending you money. “Credit unions are relatively new in the corporate lending field,” says Tom Lowles, director of Portland Community College’s Small Business Development Center. “I don’t see them as a big player.” Pros: Microlenders as the name suggests are small scale lenders which can prove to be a useful source of business funding for those with imperfect credit. Though most loan are less than $5,000 per person, some microlenders offer up to $25,000. Microlenders are typically more flexible with the loan terms and what they will accept as collateral. Cons: Microlenders aren’t widely available across the US and when you do find one, be prepared for disappointment – they don’t lend large amounts of money A microlender’s evaluation process is often just as lengthy as that at a bank. Prior to the economic crisis, the evaluation process took 15 to 30 days. Currently, however, a microlender can take 45 to 60 days to assess your business loan application. ‘Social lending’ businesses are looking to fill the gap that over cautious microlenders have created by directly connecting potential borrowers with a financing proposal. Such services can bring in quick cash, but the riskier the loan, the higher the interest rate will be. Friends and family: the kind of people to turn to in times of need; be it for fun, laughter, or in this case, money. Pros: Fast, low cost and devoid of any lawyer fees (usually), tapping friends or family for a business loan has very obvious appeal. You don’t have to jump through hoops to appease the business manager at the bank or justify your less than perfect credit rating. “It’s usually a minimally documented transaction without any lawyer fees, says Eric Siegel, a lecturer with the Wharton Entrepreneurial Programs. “It’s a fast, low-cost benefactor relationship with Uncle Harry who has a lot of money and just wants to help you out.” Cons: If your business goes bust you may never be able to look Uncle Harry in the eye again. You are likely to feel much worse about losing a relative’s cash than a bank’s money. In order to prevent any unpleasant situations you could consider making the loan formal through a lawyer or other third party such as an accountant. Factoring takes the stress out of chasing down invoice payments. A factoring company will give you a percentage of your outstanding invoices and collect the full amount from your debtors at a later date. Factoring therefore frees up money you would otherwise have no access to until the invoice was paid, which is usually up to 30 or even 90 days later. Factoring firms profit from fees they charge for the services – which are typically 1.5% of your invoice value. However, take note, most factoring companies don’t insure against non-payment, which means if your customer defaults you have to repay the cash you were advanced. Pros: “Factoring gives you instant cash, thus stabilizing your cash flow while reducing overhead,” says business coach McKinley. “It also relieves your accounts receivables department from having to grant credit or risk larger invoices with clients.” The International Factoring Association (IFA) can help you find a factoring firm that meets your business needs. Cons: Unless you really find chasing invoices is a waste of valuable time and resources, you will find factoring an expensive way to do business. Many businesses use factoring out of laziness, when a more disciplined approach to account receivables would make more economic sense in the long run. Venture capitalists are entrepreneurial types who are looking to invest in start-up businesses that hold a lot of promise. Pros: If you do your homework and find a venture capitalist in your industry sector, you can secure larger sums of money than a bank would not have been prepared to offer. Venture capitalists are not afraid of taking calculated risks and providing you offer all the correct assurances and provide a watertight business plan, a VC may take a gamble on you when others won’t. Venture capitalists are not interested in your credit rating, but will assess your credibility as a person and as a business. Cons: Scrutiny. That is what you will undergo should you appeal to VC for business funding. Furthermore, many VCs will look for partial ownership of your company should you secure funding and even if they don’t they are still an expensive prospect. Venture capitalists tend to take bigger risks than banks, therefore they expect, and deserve, a lucrative reward. Pros: Most businesses begin on little more than a wing and a prayer, so it’s no surprise Angel investors can be divine help in your time of need. These angels, however are not the heavenly kind but wealthy individuals who invest in promising ventures at the very early stages. Typically, an angel is another business owner who can be a convenient source of expertise as well as a provider of much needed capital. You can contact various angel groups in the US through the Angel Capital Association. Cons: Some angels are considered wild cards because they operate to their own rules. Reason being, they are playing with their own money. Angels, much like VCs, will want a slice of the pie so if you seek a business loan through this channel, you must be prepared to sacrifice complete ownership of the business. Pros: Credit cards allow flexible borrowing. For more information, visit credit card benefits Cons: Interest rates can be very high and if you rely on a business credit card for borrowing your run the risk of defaulting, which would ruin your credit rating. Credit cards are something of a last resort when borrowing for business. For more information on credit reports and how to avoid damaging your credit rating, click here. Pros: The governments awards $2billion every year to struggling high-tech companies through the Small Business Innovation Research program. In addition to this the government has the Department of Housing and Urban Development, which help businesses if the venture falls within target development area. For information on grants and how they may be able to offer business funding, visit Grants.gov Cons: Most businesses do not qualify for grant aid because they do not fall within the grant provider’s very specific niche criteria. Credit Union Business Loans
Business Microlenders
Nearest & Dearest
Business Factoring
Venture Capitalists
Business Angels
Business Credit Cards
Business Grants
