Small Business Loan Alternatives

Can't qualify for a loan? Explore other options for raising money
By Cherie L. Berkley, Owner Legacy Letters, LLC Whether you are just starting up or simply concerned about operating costs for an existing business, you need capital. If you can't qualify for a traditional small business loan there are a host of alternatives. Small business loan alternatives are a growing breed among small business owners. However, these sources of funding often will cost you more — in interest or ownership — than a conventional bank loan.

Three reasons a small business owner might seek alternate business loan options are:

1. The business has not established a credit history.
2. The business does not have enough collateral to qualify for a conventional bank loan.
3. There is no operating history. It's easier for a brand-name start-up to get money than an unknown business.

Angel investors

An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for ownership equity. They are often part of an angel group or angel network. Angel investors do not manage money, but do require a high return for their risk. This can be costly.
Try:  Check with the Angel Capital Association or the Go Big Network to locate angel investors near you.

Venture capitalists

Venture capital is money provided by outside investors to finance new, growing or struggling companies. These investments are typically high risk, but investors expect a high return in exchange. A venture capitalist (VC) is a person who makes these investments. VCs don't care so much about a company's assets as they do potential for growth and the product they are finding investors for.
Try:  The Mayfield Fund, Kleiner, Perkins, Caufield & Byers, and Benchmark Capital are some of the most well-known VC firms. In addition, the National Association of Small Business Investment Companies is a good source for finding VCs. The NASBIC is dedicated to small companies.

Asset-based lending

These cost-competitive loans provide flexibility and generally come with fewer covenant requirements. Lenders will evaluate your company's asset coverage, liquidity and ability to service the debt.
Try:  Find lenders who specialize in asset-based lending at Capital-Connection.com.

Royalty financing

Considered an ideal loan alternative for startups, franchises and expanding businesses, royalty financing lets you obtain the cash you need without giving up equity in your company or control of your operations. The loan is repaid based on a predetermined percentage of gross sales.
Try:  First Principal Royalty Corporation provides royalty-based financing as well as information on the benefits of this type of loan.

Accounts-receivable financing

For small businesses in cash flow-challenged industries, accounts-receivable financing – also known as factoring – can be an ideal alternative to a traditional loan. With this type of financing, a factor pays you cash upfront for your receivables – at a discount, of course. Factoring can be an expensive form of financing, costing approximately 3 percent of the total amount of receivables.
Try:  Try the Facteon factoring service, which requires no ongoing contracts and can provide cash for a single invoice or for all your invoices, or JDFinancial.com, which works with start-ups and established businesses.

Debt negotiation

One alternative to taking out a loan is lowering your company's expenses by reducing your debt and payables. Negotiating a debt settlement with creditors can help you create a repayment program that keeps your cash flow in balance and eliminates your need for a loan.
Try:  CommercialDebtCounseling.com provides business debt negotiation services.

Joint venture assistance

Taking out a loan isn't the only way to finance expansion. Instead, find a partner to help your company grow or find a product that will create a new profit center. Be sure to spell out the details of your joint venture in a written agreement.
Try:  The Joint Venture Home Page for small and mid-sized businesses is dedicated to brining businesses together and lists companies that are looking for partners. Download a joint venture legal form from Internet Legal Research Group.

Trade and barter

If you're seeking financing for purchases, such as equipment or inventory, consider trading or bartering with assets you own. This centuries-old technique is a good alternative to cash for your business.
Try:  Find out how to get started, how to use barter and when to use it at the online public trade exchange at Onecer.net.

Friends and family

Prevent misunderstandings and bad feelings by always getting agreements about loans spelled out in a contract. Include a payment schedule and any terms or conditions.
Try:  Hire a local corporate attorney through the American Bar Association to write up a contract, or write it yourself with Business in a Box or Cobblestone's Contract Management Software.

• Avoid using equity in your home to finance your business. You put your home on the line if the business goes south.
• Small business loan alternatives are often costlier than traditional banks. Weigh the pros and cons of going this route.
• Have a sound business plan before approaching investors. It will be easier to sell your idea.
• Credit cards are unsecured debt that may be a simpler route. But beware: It's easy to get in over your head.