Newly launched businesses that lack a track record of financial success may find it difficult to obtain loans from banks and credit unions. With half of all new enterprises folding within five years, financial institutions are often wary of businesses defaulting on their loans. Fortunately, budding entrepreneurs can take advantage of several other options to raise the capital they need. Here’s a look at some of the more popular lending alternatives available to small business owners.
As the name suggests, crowdfunding raises capital by pooling together contributions from a group of people, typically using websites like Indiegogo or Kickstarter to give an entrepreneur a platform on which to pitch his or her business idea and to collect the money. In most cases, contributions are made in return for some sort of reward related to the startup in question, like exclusive offers on whatever product or service the business provides. In equity-based campaigns, investors receive shares in the company in exchange for their investments.
Crowdfunding has gained steam over the past few years in part because it doubles as an excellent marketing vehicle for new businesses. Even if contributions to your cause aren’t overwhelming, a crowdfunding campaign can still spur discussion about your business. If you aren’t collecting funds as effectively as you hoped you would, you’ll know that your pitch requires some additional tweaks. This makes crowdfunding especially helpful for early-stage businesses and first-time entrepreneurs. Having lent over $700 million since its inception in 2010, Funding Circle focuses exclusively on small businesses, making it a popular destination for budding businessmen and women.
2. Peer-to-peer (P2P) lending
Unlike crowdfunding, P2P lending more closely resembles the type of lending offered by banks and credit unions. Online platforms like Prosper and Lending Club help borrowers locate and get in touch with potential investors. P2P lending can provide greater returns for investors and lower interest rates for borrowers. Investors don’t receive a stake in the business they’ve invested in, which makes this type of fundraising especially attractive to entrepreneurs who want to maintain complete control of their enterprise.
3. Lending circles
Lending circles provide yet another alternative for small business owners looking for cash. Groups are typically small, consisting of about six to 10 people. To begin with, the collective decides on a dollar amount to be raised every month—say, $500. Each participant pitches in equally to meet that sum, with one person receiving the entire amount each month until everybody has had a turn and all loans are paid off. Third-party facilitators, like San Francisco-based Mission Asset Fund, help gather the money and make sure members’ contributions arrive on time. Though small business owners will likely have to look beyond lending circles to raise all the money they need, this credit score-boosting mechanism can help loan applicants look much more appealing to banks and credit unions.
4. Asking family and friends
Small business owners with extensive personal connections may want to pursue crowdfunding campaigns that specifically target family and friends. Several websites are dedicated to helping entrepreneurs ask for funds from close acquaintances and loved ones. One such platform, TrustLeaf, provides all the necessary legal documents, keeps track of payments, and makes it easy to communicate with your potential investors. Using a website like TrustLeaf adds organization, structure and legitimacy to your fundraising campaign, and may make hesitant family members and friends more willing to pitch in.
5. PayPal and Square
Avid online shoppers will be familiar with paying for goods or receiving payments via PayPal or Square. It may come as a surprise to some, though, that both digital payment websites have ventured into the small business lending world. Business owners with over $20,000 in sales on PayPal over the last year qualify for the website’s Working Capital program to receive up to $60,000 in loans. Instead of asking for monthly repayments, PayPal simply takes a cut—typically between 10% and 30%—of the business’s daily sales.
Functioning in nearly exactly the same way as PayPal’s service, Square Capital grants loans to small business owners who make automatic payments that are set up as fixed percentages of their daily sales. The lower the amount of the total loan, the lower that percentage is. For example, a loan of $4,000 would include a fixed repayment rate of around 4% per day, while a loan worth $10,000 would carry a rate closer to 10%.
6. Nonprofit organizations
Though primarily a source of microloans, nonprofit lending institutions can also serve as a helpful stepping stone in receiving more sizeable loans. While smaller organizations like the Colorado Enterprise Fund focus on developing small businesses in their states, larger nonprofit networks, like Accion USA, have offices throughout the country that provide loans to local businesspeople. Regardless of their size, most nonprofit lenders typically offer rates and terms that are more flexible than those found at banks and credit unions. Offering both loans and financial education, nonprofits like Accion tend to focus on low- to moderate-income business owners.
7. Turn to the SBA
For entrepreneurs who are steadfast on acquiring traditional loans from banks or credit unions, the U.S. Small Business Administration (SBA) can be a valuable resource. Although the SBA doesn’t directly provide loans, it places a government-backed guarantee on any loan that it helps facilitate, which offsets much of the risk for banks and credit unions. Businesses can apply for a range of loan programs through the SBA, including microloans of up to $50,000 for day-to-day expenses, equipment and renovation, and larger loans of up to $5 million for more ambitious projects, giving entrepreneurs plenty of choices. To find SBA-approved lenders near you, check out the SBA’s search tool.
Though it may sting, having your loan application rejected by a bank or credit union doesn’t have to spell the end of the road for your small business. With so many alternatives out there, your biggest challenge could be determining which funding option is best for your business.
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