As a small business owner, you may find it difficult to receive financing to help your business grow or even just to survive. Have you been declined by your bank for a business loan? The answer to this more times than not is “YES.”
As of July 2019, big banks approved small business loans only 27.7% of the time.
So now what are your options? Friends and family can only go so far.
You could try your luck securing other types of financing, such as:
A Business Grant – This is money given to a business by the government, an organization, or a person for a specific business purpose. The money given must adhere to specific guidelines laid out in the grant application.
An Angel Investor – This is where a high worth individual provides financing backing in exchange for a percentage of your company. Think of the television show Shark Tank.
Crowdfunding – You can raise money by asking multiple people to invest in your company or project in return for a reward or percentage of your profit.
However, while these options sound great, they are also difficult and time consuming to get.
Your best option may be to look into funding from an alternative lender. Fortunately, there are several alternatives and many private lenders willing to take the risks and provide capital for businesses in need.
What is Alternative Lending?
Alternative lending refers to lenders other then a traditional bank. Typically, these types of lenders operate online.
Why Alternative Lending?
Alternative lenders can stomach the risk associated with businesses that are relatively new, are seasonal, have bad credit, or have no collateral. They also play a role when any businesses owner is in need of fast capital and do not want to wait for their bank to finance them.
Banks can take between 60 and 90 days to get you approved. Alternative lenders can underwrite and fund your loan within 72 hours, depending on the funding option.
Alternative Lending Requirements
The process for a business owner to receive alternative financing is relatively simple.
Rather than being based on your personal credit score, the lenders look more toward the overall business performance. They look at monthly revenues, cash flows, bank balances, negative days, beginning and ending balances.
Your personal credit score is taken into account but is primarily used as a gauge in determining a loan amount, rate, and term. Banks will use your credit score to approve or decline.
To underwrite a business loan requires a single page application, 3 to 6 months of your most recent business bank statements, and some processing statements if your business takes credit cards as payment.
That’s all that is needed to get you a lending decision. And you should know within 24 hours regarding a funding approval.
Funding Options and Repayment Terms
The types of funding options may vary between alternative lenders. Here are the more common types:
Working Capital Advance
A Working Capital Advance is perfect for a business owner who has poor credit or has been in business less than 2 years, and has a strong, stable monthly revenue.
The repayments are paid daily Monday through Friday directly from your ACH debit via your business bank account. To some, this may seem a little aggressive. However, these loans are considered higher risk due to your personal credit score and time in business.
Business Line of Credit
A Business Line of Credit is more of a traditional loan, where you have simple interest rate and pay monthly. This type of loan also affords you some flexibility in that you can take out as much as you need (up to the approval amount) and only pay interest on the withdrawn amount.
Short Term Business Loan
A Short Term Business Loan is also structured like a traditional loan. You will pay back your loan amount plus an APR. This will be paid monthly up to a 5-year term. To qualify for this loan you will need a stronger credit score (but still only a 640) and you will need to be in business at least 2 years.
This loan, may take longer to fund. Up to 2 to 4 weeks in most cases.
An SBA Loan is the “cream of the crop” when it comes to alternative lending.
Because this loan is government-backed and partially guaranteed by the Small Business Administration. As such, qualifying will be a little more difficult than the other funding options and funding will take longer, up to 4 weeks.
If you need to purchase a piece of equipment for your company, Equipment Financing may be your best option.
You may be able to finance up to 100% of the equipment cost. Since the equipment will be used as collateral, the terms could be more favorable than some of your other loan options.
Bank Said No…You Have Options
Don’t get discouraged if you are turned down by your bank for a business loan. You still have plenty of options, you just need to do your research and understand that the terms you qualify for may not be as favorable as a bank.
A bank declined you for a specific reason, you may not agree but they are the facts. This is the reason why alternative lenders exist, so that you have other options.
But since an alternative lender is giving your business money without meeting you, requiring a business plan, needing perfect credit, taking equity (except for Equipment Financing), or telling you how to use the loan, the terms may be a little higher. This isn’t always the case, but often it is.