Shortly after I started my first business, a marketing communications company, my accountant told me that I should apply for a bank loan to give me a financial cushion and to start building a credit history for the firm. It was pretty nerve-wracking. I spent a lot of time poring over that loan application. In a few weeks, though, I was clutching a $37,000 check to buy computers and furniture, rent out office space, and hire my first employee.
Fast forward to nearly two decades later: Today, lenders are rejecting more than half of all small business loan applications. Banks often require that entrepreneurs looking for money have sky-high credit scores, sizable collateral and audited financial statements.
If you want to start or grow a business and need money for it, you don’t have to go to the bank. There are a variety of other ways to get money — certainly more than I had. These sources may not demand everything banks do, though they could have other demands. Check out these five alternatives:
Sites like Kickstarter
are using the trend toward crowdsourcing — seeking solutions from a large group, usually online — to help entrepreneurs scare up money. To raise money through any of these sites, you post a profile and video about your fledgling business, how much money you want to raise, how the money will be used and the deadline for receiving pledges from site visitors.
If your pledges meet or exceed your goal, you keep the money (minus a small cut that the crowdfunding site takes). If you don’t reach your goal, you get nothing. Most crowdfunding entrepreneurs offer tiered levels of donations, promising different types of gifts in return for donations. One startup, LunaTik, raised nearly a million dollars this way for its innovative TikTok watch, which doubles as a sort of docking station for an iPod Nano.
The video you post doesn’t have to be slick. In fact, many crowdfunding users believe it’s best to keep your video earnest and under three minutes.
Be prepared to promote your crowdfunding profile to your family and friends, along with media outlets and bloggers, to build momentum and reach your goal. You'll want to update your donors regularly about your business, too.
Business plan competitions.
These let entrepreneurs pitch their ideas in person with full-blown business plans to a panel of investors and experts for cash prizes, investment deals and consulting services. Many are sponsored by colleges and require some affiliation with the school, like a student or alumnus being part of the business’ team. Others are sponsored by investors or economic development agencies and are open to broader audiences. The website www.bizplancompetitions.com catalogues more than 400 of the competitions nationwide.
Equipment leasing and financing companies.
Members of the Equipment Leasing and Finance Association
have been on a lending tear lately. If your business needs IT resources, vehicles, specialized equipment, software or other big-ticket items, this might be the option for you.
Alternative lending sources. Recently, some new players have come on the lending scene. They may be more expensive than borrowing from banks, with higher interest rates and fees, but they can also offer more flexible terms. (Banks typically charge about 5.5 percent to 6.5 percent for fixed-rate small business loans today.)
For instance, On Deck Capital
specializes in financing small businesses that typically don't qualify for bank loans because their owners lack, say, collateral or a credit history for their companies. Its loans range from $5,000 to $150,000 with repayment terms ranging from 3 to 18 months.
If you’re already in business, the Receivables Exchange
is like eBay for your receivables (your invoices that are due). This exchange lets you sell receivables for cash to a global network of investors.
NewLogic Business Loans
specializes in making loans to restaurants, retailers and small service practices, like consultants and accountants. To qualify, you must have been in your business location for at least two years and cannot have been bankrupt during the past 12 months.
New SBA programs. Loan limits have risen — some permanently, some temporarily — for several programs from the U.S. Small Business Administration since the Small Business Jobs and Credit Act was signed into law in September 2010.
The Small Loan Advantage Program
offers loans of up to $250,000 with interest rates typically equal to the prime rate plus 2.75 percent (which currently works out to 6 percent); it's generally for businesses in underserved markets.
If your business serves a lower-income community, it may qualify for the Community Advantage
, which also guarantees loans of up to $250,000. The program's loan rates vary, but they're generally about prime plus 4 percent, or 7.25 percent today.
By Gwen Moran
Gwen Moran is a small business authority and author of The Complete Idiot’s Guide to Business Plans. She has been running her own businesses since 1992 and was a national finalist in the U.S. Small Business Administration’s Young Entrepreneur of the Year awards competition.
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