Discover small business lending methods that you never thought existed
Of all the challenges facing small enterprises, availability of funds is perhaps the biggest. Unlike large corporations, small firms do not, for instance, prepare audited financial statements. This means you cannot avail financial information that is of a credible nature. Also, being the only owne, you do not have equity that publicly trade in the stock exchange market. As a result, there are no public rating to gauge whether your firm is doing business at the desired quality set by the industry.
Is there no way out for small and medium-sized enterprises?
Without financing, you cannot transform your business into a competitive entity. Having an enterprise up and running is not enough. You must continually seek opportunities for growth. Small business lending can help you fend off challenges that come with inconsistent cash flows. All businesses, including those operated by multi-billionaires, require credit at some point. Traditional lenders have, unfortunately, set up approval and loan qualification process that is way too harsh. They will frustrate you, but that does not suggest that the commercial world is unwilling to provide a way out.
How can angel investors help?
Despite angel investors operating on the same principle as venture capitalists, there is a difference between the two sources of business lending. Unlike the latter who consist of companies, angel investors are individuals who come to assist your business. The investor comes in solo but in exchange for a portion of your equity. Before you pen an agreement with such a partner, get to know ahead of time whether they want participation in the day-to-day running or prefer being hands-off. An active angel investor will want a regular update of what you do, plus he or she wants to throw their weight on business decisions.
What is the role of venture capitalists?
On their part, venture capitalists love startups especially those that exhibit potential for growth. Unlike banks that keep away from new businesses, venture capitalists are risk takers. Besides, they allow you to tap into their vast network of associations. Through these channels, you can gain useful insights and motivation on how to drive your business forward. After obtaining the cash from a VC, you must sign a document that transfers a portion of your equity to them. Venture capitalists support startups and emerging enterprises for as long as they can make money. If your company’s revenue and working capital start dwindling, a VC will not hesitate to pull out.
Are online loans viable?
Getting a short-term loan online is now easier than it was decades ago. The application process and approval are online, meaning that you can have financial assistance within hours. Besides, you do not have to wait for several days to know whether you have succeeded or not. A traditional bank or other lending institutions can make you wait in agony only for them to give you a negative response. Despite the ease of obtaining funding online, you still need to carry out research. Not every lender who advertises their services would be a befitting choice. There are also some requirements that they want you to meet.
What about crowdfunding, is it an option?
Crowdfunding platforms provide access to funds from a pool of investors. This approach requires you to find a site and pitch your business idea. Also, you must share a demo or business plan that shows the product or service you intend to offer and how it differs from the competition. If the potential investors like it, they commit funds, and you can be on your way to expanding your enterprise. One benefit of crowdfunding is that investors will hardly ask for a share of equity. However, they insist on buying your products or services at a discount which is not a difficult thing to consent.
Is borrowing from friends and family worth the effort?
Seeking the support of close family members or a bunch of friends can work to your advantage. Sadly, some entrepreneurs fear seeking small business loans from family or friends. They are hesitant that once the business hits turbulence and repaying the loan becomes difficult, they will strain relationship between them and their lenders. However, you can overcome this obstacle by keeping your promise at all costs. Treat the agreement in the same way as you would a relationship with your bank. Taking the relationship for granted with the presumption that these partners are close to you is the surest way to destroy your relationship.
Countering the banks stringent no lending policy
After the financial crisis in 2008, banks tightened their requirements. Most financial institutions require that you provide collateral and question your time in business. For a small enterprise, you may find it challenging to have assets whose value is sufficient to act as security. Besides, as a sole proprietor, you cannot distinguish between your assets and those belonging to the business. These days, only those businesses considered creditworthy get financing. Luckily, with the emergence of non-banking lenders, you have access to more sources of funds than you ever knew. However, even before you approach a prospective lender, you must get your stuff ready. Here are steps you can take:
- Check your credit status – clean it up
A poor credit score can ruin your chances of getting funds not only from the mainstream but also non-traditional lenders. Some invoice factoring companies will, for instance, dig into your financial history. Obtain copies of your credit report from the three main bureaus. Check your status carefully and find ways of improving it. You could start by lowering your credit utilization ratio which is a measure of your current debt compared to the credit availed. Also, start paying down your credit card debt. If there are errors in your report, push for their removal. A citizen’s payment history accounts for 35 percent of the credit score. For a better credit rating, you should place more emphasis on repayment.
- Make your projections in advance – counter check their accuracy
Unsecured loan products can at times attract high interest rates. Before approaching a lender, make projections of your cash flow. Ascertain that you have or will have enough money to service the loan. Preparing a prediction of your cash is not difficult. However, if you still cannot hack it ask a finance expert to help you. You could also learn how to prepare this and other projections online. Be as accurate as possible in your estimations and avoid over-estimating. You had better understate your figures, but generate more revenue in retrospect than the other way around. In addition to financial projections, you also need to have the following documents ready:
- Income statement
- Balance sheet
- Tax returns
- Business license
- Research for potential lenders
Most lenders that are in the non-banking sector carry out their business activities online. Despite their having similarities in the services offered, they are not the same. Do your research and find out the type of loans on offer. Some will give you funding at a fixed interest rate while others vary their terms. Merchant cash advance, despite its numerous benefits, can be costly. Also, some lenders require you to show your revenue analysis for a year or six months. Others will offer you funds at different brackets graduated according to your credit score.
- Falsehoods on lending for small businesses that you need to dispel
- It takes longer for your loan approval
Misinformation can jeopardize your effort at getting a business loan. Friends can try to discourage you by stating that you will wait for a long time. That kind of feedback is not right. Lending has now gone a notch higher by going online. You can fill out your application using a computer, laptop or mobile device. The lender then reviews and approves quickly, after which you can get cash in a day or two.
- Is your business newly established? You will not qualify
While there is truth in saying that business startups are never easy, having a new company does not disqualify your prospects of obtaining funds. There are lenders out there who specialize in startup lending. Therefore, whether you have been in business for less than a year and do not have a lengthy credit history, you can still secure a business loan.
- Your credit score is low, and loan officers will turn you away
A low personal credit score can leave you feeling hopeless, and you give up the quest for funding. Alternative providers of credit have since sprung up plus they do not focus on credit scores alone. Small business lenders are now focusing on other business aspects to determine whether you are an eligible borrower or not. Things like your cash flow status, revenue, and other financial reports paint a picture of the state of your enterprise. Never let a credit report pale your effort.Entrepreneurs may at times be at a point of ignorance on the financing options available besides banks. The mere fact that no bank wants to fund your venture does not mean that you are running a useless enterprise. There are organizations created for offering small business loan arrangements.
A sneak peek on SBA loans
SBA loans are another alternative that small business owners can exploit. The US federal agency guarantees these instruments of finance. In return, lenders can issue the facility to entrepreneurs at low rates of interest and on flexible terms. However, getting a 7(a) loan is not a mean task. Most of the lenders authorized by the government to issue SBA loans come from the mainstream banks. Interest rates for this facility depend on the prime rate. However, banks are at liberty to add their markup. Another benefit is that you have an extended time to repay the loan compared to what other lenders offer.
If you are borrowing to fund your daily operations, SBA will grant you seven years to pay back. Loans to purchase new equipment attract a ten-year repayment period. Loans for the purchase of real estate can take up to 25 years to clear. The longer the term, the lower your interest rate. The Small Business Administration loan comes with a guarantee. In the event of a default, the agency shall pay its end of the deal. As a result, lenders can offer you a repayment plan that results in reduced monthly payments.
There is no doubt that small and medium-sized businesses face cash flow challenges. Banks have been reluctant to lend money to enterprises citing a lack of proof of creditworthiness. Fortunately, there are solutions for borrowing money outside the confines of banking institutions.
- It takes longer for your loan approval