Did you know that 55 percent of small businesses that apply for a loan are rejected? If your revenue is under $1 million, you’re less likely to get a traditional loan.
This rejection rate could be why business owners spend lots of time time filling out applications. Business owners say they need to approach many lenders before they get the funding they need.
If a traditional loan is off the table for you or you’re worried you may not be approved, you might feel you’re out of options.
You’re not. There are plenty of alternative business lending options you can explore.
We created this guide to help you get familiar with the many different types of lending available to you. We’ll review the pros and cons of each. With this information in hand, you can get the funds you need to grow your business.
Check out Microloans
If you weren’t approved for a traditional business loan, it may have been the amount you requested. If that’s the case, you might want to take at microloans.
Microloans are very much like traditional loans, except on a smaller scale. The average amount on a microloan is around $13,000.
If you don’t need a lot of capital, a microloan could be a great way to access the funds you need. If you need more money, they’re probably not the right choice for your business.
Lines of Credit Give Revolving Credit
Another alternative lending option you have is a line of credit. Unlike a traditional loan, the line of credit is a form of revolving credit.
Much like a traditional loan, you use the funds and then pay them back. The major difference is that as you pay back the line of credit, the funds become available for you to use again. You also don’t need to take the entire amount in one lump sum.
If you need funding on an ongoing basis, a line of credit could be a good idea. If your needs vary from month to month, a line of credit may also be the right option. It provides much more flexibility to small business owners.
Financing the Future
Some alternative finance companies allow you to get cash advances on projected income. One option is merchant cash advances. With this structure, you receive a lump sum loan against future credit card sales.
This is a great option for merchants who have a bad credit history. This financing is forward-looking, so it doesn’t take your credit history into account.
You then pay the lump sum back as you make sales on credit. If you don’t accept credit cards, this option isn’t available to you.
If you invoice your clients, though, you may be able to bank on your accounts receivable. Invoice financing or invoice factoring allows you to take your invoices to a lender. They’ll then advance you the cash.
When the client pays the invoice, the lender accepts it as a payment to your loan.
If cash flow has been uneven, this option can help you cover-short term expenses.
Alternative Business Lending Leverages Your Network
If you’re struggling to find the financing you need, why not ask the people you know for a helping hand?
Friends and family may be able to help you by giving you a small loan. This could help you get through a rough patch or start a new initiative. The lender may also give you more favorable terms.
In some cases, people may ask for a share in the business or to be paid part of your profits on top of the loan.
Peer-to-peer lending lets you leverage the business community instead. You may find a loan through a colleague or mentor.
P2P lending is still relatively new, but it’s like asking friends and family for loans. It’s often conducted through a more informal network, and you may be able to secure more favorable terms.
Crowdfunding is another way of leveraging your network to raise funds. People you know may rally together to help you achieve a specific aim. There are business-specific crowdfunding sites, which connect you with potential donors.
Other Loan Types
There are a few more types of alternative business loans. One is the short-term loan, which is generally paid back within 18 months.
Short-term loans offer flexibility, since they don’t require the same paperwork. Their repayment terms are also flexible, which is great news for business owners. They’re often the loan of choice for funding growth.
A working capital loan is a specific type of short-term loan. It’s designed to help you with short-term costs. You can use one to pay your electric bill or to fund payroll.
Neither of these loan types is a good choice if you need to sink some funds into equipment. If that’s the case, think about an equipment loan.
These loans are like car loans, and they can be used to fund the purchase of almost any type of equipment. Whether you need a new office computer or machinery for your factory, an equipment loan could be the right fit.
Online loans and unsecured loans may also be options for your business. Alternative lenders may be willing to provide an unsecured loan, which means there’s no collateral. They usually come with higher interest rates, though.
Many lenders will offer online loans, which you apply for and manage over the internet.
Other Lending Options
If you were denied a small business loan, you may still be able to get a personal loan. Personal loans could help you access the funds you need.
They aren’t always the right option, though. First, you may not be able to get the funding you need. Second, if you’re unable to repay the loan, it will affect your personal credit score.
Business credit cards are another way businesses can access funds. Like a line of credit, a business credit card is a type of revolving credit. As you pay back the funds, they become available to borrow again.
A business credit card could help you manage monthly expenses or unexpected costs. Many of them come with bonuses, such as travel points. The downside is that they do have high rates of interest.
A final type of lending you may want to consider is government loans. The Small Business Administration backs several types of loans for small business owners.
SBA loans are very similar to traditional loans. You may even approach some of the same lenders. The difference is that the SBA guarantees part of the loan.
This reduces the lender’s risk, which may make them more willing to extend funding to you. This is a great option if you don’t have a lot of collateral.
Look at Business Grants
Business grants aren’t a type of alternative business lending. They are another way small business owners can get funding.
A grant is different from a loan. You must pay back a loan. A grant is money that you don’t need to pay back.
This makes business grants somewhat more difficult to get than loans. If you were rejected for a loan, you might not think you’re eligible for a loan.
You should explore your options, though. You may qualify for a grant if you’re a veteran or if you’re a woman, for example.
Governments aren’t the only entities that issue grants. Non-governmental organizations and even some private businesses may offer grants.
Pros and Cons of Alternative Business Lending
Some of the advantages of alternative business lending options are obvious. Many of them provide more flexibility than traditional loans. This makes it easier to run your business.
The many different types of lending make it easy to find the right financing for your needs. If you need ongoing funding, a line of credit might be right. If you’re seeking a loan for bad credit, a merchant cash advance could fit the bill.
Many of these loan types are also easier to secure. You may not need to have as much collateral. Some of them can be issued quickly, as well, which helps you get the funds you need faster.
There are a few drawbacks to some types of lending. Some lenders may charge higher interest for unsecured loans or loans for bad credit.
When working with alternative lenders, small business owners should read the fine print. Be sure you understand the terms of repayment and more.
Don’t be afraid to shop around either. Some alternative lenders offer better terms or more favorable interest rates.
Get the Funding You Need to Grow
Whether your business is growing or in a rough patch, alternative business lending could help. If you need more guidance on choosing the right loan, get in touch with us. We have the expertise to help you pick the alternative lending solution that fits your needs.