Starting or expanding a business often requires capital that many entrepreneurs don’t have on hand. While bootstrapping with personal savings or credit cards is possible initially, there will likely come a time when you need an influx of cash to take your business to the next level. This is where a small business loan can help.
There are several good reasons to consider getting a business loan:
- Purchase equipment and other assets: One of the top uses of small business loans is to purchase equipment like machinery, vehicles, furniture and technology that are essential for growth.
- Renovate or purchase commercial space: If you’re moving into larger offices or your first retail location, a loan can assist with renovation costs or a down payment.
- Increase inventory & production: Additional inventory allows you to meet higher sales demand. The capital from a loan can help cover the upfront costs before the additional revenue starts coming in.
- Hire employees: Bringing on more staff is often vital to scale, but you have to be able to pay those additional payroll expenses before the new hires start generating revenue.
- Bridge cash flow gaps: There may be fluctuations in cash flow that temporarily limit your ability to cover costs. Short-term loans help bridge those periods so you can keep operations running smoothly.
While getting approved for traditional small business bank loans can be challenging, especially for early-stage companies, there are some creative alternative lending options to consider.
Unconventional Ways to Get Business Funding
If the traditional loan application process seems daunting or you’ve already been declined by your bank, there are a number of unconventional lending sources to explore:
- Online lenders: Also known as alternative or marketplace lenders, online loan providers like Fundbox, Kabbage and Credibly have transformed small business lending. The application process is simpler and faster with online lenders and they will consider newer businesses.
- Microloans: Offered by nonprofits focused on economic development, microloans typically range from $500 to $50,000. Applications are simple and the interest rates are low, making them ideal for very small businesses.
- Business credit cards: While not technically loans, credit cards allow you to spread payments over time. Cards for new businesses from providers like Brex allow you to build business credit. High credit limits mean you can fund large upfront purchases while paying it back gradually.
- Peer-to-peer lending: Websites like Lending Club and Prosper allow individuals to lend money to businesses directly. By opening up lending beyond banks, peer-to-peer sites may offer more affordable rates and terms.
- Friends & family loans: Getting loans from people you know may feel awkward, but often friends/family are happy to help a business they believe in. Define terms clearly in writing to avoid issues down the road.
- Retirement plan funds: If you have savings in a 401(k) or IRA, the IRS allows you to invest a portion in your own business without penalties. This can be an inexpensive way to access start-up funding.
- Crowdfunding: Platforms like Kickstarter and Indiegogo let you pitch your idea to potential backers. By getting lots of small investments, you can quickly raise thousands to fund your venture.
When you’re ready to take your business to the next stage, exploring both conventional and alternative lending routes increases your chances of getting approved for the working capital you require. With all the options now available, lack of funding doesn’t have to be the roadblock it was in the past. Analyze both your needs and ability to repay before diving in so you choose the best loan for your situation.