For years, business owners have turned to commercial banks as a resource when they need cash. Strict lending standards and timing can make it impossible for businesses to get a commercial bank loan. Fortunately, alternative funding sources make it easier for people to get loans. Before selecting a lender, it is important to consider the loan's terms. Understanding how unconventional lenders work is key to making an informed decision.
When commercial lending services were not an option, small business owners turned to friends and family. Crowdfunding sites have become a highly-popular method to get friends, family, and others to help finance projects. Indiegogo and Kickstarter are two of the more well-known crowdfunding sites. Some of these websites require you to reach your fundraising goals to receive the pledged money. Other sites will allow you to keep the funds even if the goal is not reached.
2. Peer-to-Peer Lending
Peer-to-Peer lending is a relatively recent funding source that brings together borrowers and investors. One of the benefits of this type of lending is that the borrower gets quick access to capital. These lenders may be a good resource if you need cash fast. Your credit rating will play a role in whether or not you get a favorable interest rate. If your credit history is not great, peer-to-peer lending might not be a good option. Most of these lenders only work with borrowers who have a credit score of at least 600.
Factoring, the act of selling your accounts receivable to a financial institution (factor), is another way you can get cash fast. Businesses use this tactic to manage slow-paying customers and cash flow. With factoring, 75% to 80% of the accounts receivable is advanced. The remainder is left as a reserve to be forwarded once the invoice is paid. The amount of money the borrower receives depends on the quality of the accounts. The downside to using a factor is the extremely high cost. Factoring is ideal for businesses that experience a considerable time delay when collecting on receivables.
4. SBA Microloans
The U.S. Small Business Administration has several loan programs available to help business owners launch, or grow, their business. The microloan program is the easiest to access. It gives loans of up to $50,000 to qualified childcare centers and small businesses. These lenders do not only offer loans; they provide assistance to help your business succeed. Depending on the loan, some borrowers are required to attend training classes before their application gets considered.
5. Private Lenders
The rise of the private credit firms is the result of the financial crisis that occurred more than a decade ago. Private credit firms specialize in large loan amounts that usually start in the millions of dollars. These loans have grown in popularity for medium-sized businesses because of the speed of their loan approvals and flexible terms. There are cons to using private lenders. The cost of borrowing money is much higher than with traditional loan sources. Also, it's common for these lenders to charge a prepayment penalty if the loan is repaid early.
6. Home Equity Loans
If you can't obtain a business loan, perhaps the next option is a personal loan. One way to get a loan is by borrowing against the equity in your home and putting the money into the business. Because personal loans are secured loans, people with a decent amount of equity in their home and a good credit score will receive lower interest rates. The main caveat to a home equity loan is the fact that defaulting puts your home in jeopardy.
7. Customer Lenders
The community-supported agricultural model of lending has extended beyond farming and is used by businesses to fund their operations. This type of lending allows businesses and customers to share some of the risks. In exchange for cash, the customers get discounts on products or services. This type of lending relationship usually works for businesses with a strong connection to their community.
If a traditional business loan is not an option, maybe you should consider using an alternative lending source. These sources can help you get the financing you need. Make sure you fully understand the terms or conditions of the loan before signing any contract.
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