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:
- The business has not established a credit history.
- The business does not have enough collateral to qualify for a conventional bank loan.
- There is no operating history. It's easier for a brand-name start-up to get money than an unknown business.
Angel investorsAn 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.
Venture capitalistsVenture 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.
Asset-based lendingThese 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.
Royalty financingConsidered 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.
Accounts-receivable financingFor 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.
Debt negotiationOne 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.
Joint venture assistanceTaking 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.
Trade and barterIf 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.
Friends and familyPrevent misunderstandings and bad feelings by always getting agreements about loans spelled out in a contract. Include a payment schedule and any terms or conditions.
- 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.