If you’ve recently just been rejected for your small business loan, this might be the most important article you’ll read today!
Here’s why:
I believe getting financing for your business is one of the fastest and easiest ways to start and scale a company.
However, financing a small business or a start-up involves a long process. It will be difficult, especially if you have poor credit.
Fortunately, nowadays, traditional banks are not the only ones that can help aspiring entrepreneurs and business owners.
Studies show that most small business owners prefer alternative financing over traditional bank loans and other options.
These alternative financing options are great for people with bad credit since some lenders don’t require a minimum credit score.
Consider these alternative financing options if you have a low credit score and no collateral to offer.
Check out different options and their benefits.
With my 25 years of experience as a financial coach and banking expert, below, you’ll learn the secrets of financing your startup.
What Is Alternative Funding?
Alternative financing is any financing type that banks and other lending institutions do not traditionally offer.
“Why choose these alternative lenders?”
Business owners who lack assets and little credit history find it difficult to get funding from traditional financing sources.
Reasons to Choose Alternate Funding for Small Business
Alternative funding means financing outside of the traditional funding options.
There are a few reasons why business owners usually need research alternative funding.
A few of the reasons to choose alternate funding are:
Lack of assets
Small businesses may lack assets to offer as collateral for the loan. This makes business owners a risk, which causes your loan denial.
Limited credit history
Many start-up business owners choose alternative funding since they don’t have much credit history to show lenders. Lenders love to lend money to people with a comprehensive and great credit history.
High-interest rates
Traditional financing options, such as banks, tend to have higher interest rates, which can be costly for small business owners or startups.
Alternative lenders can offer lower interest rates and lenient terms.
Time-consuming process
Applying for a traditional bank loan can be time-consuming, and there’s no guarantee that you’ll be approved. Don’t expect to get a hold of the money right away.
On the other hand, alternative funding options give you a better chance of getting the loan within a much shorter timeframe.
Many entrepreneurs opt for alternative funding to secure loans.
Stick with me; you’ll learn about loan providers such as venture capitalists, angel investors, crowdfunding, and more.
When to Consider Alternative Financing
Securing a loan from traditional lenders can be challenging, making alternative funding the better option for small business owners.
Consider looking for alternative lenders if you’re currently experiencing the issues below:
You have a poor credit score
Lenders favor individuals with good credit scores because it tells them that the person is responsible and trustworthy enough to repay the loan.
Traditional lenders often have high credit requirements, which makes it difficult for a startup.
Alternative financing helps provide these loans to small business owners with little or bad credit scores who want to expand or grow their businesses.
You need quick funding
Loans from traditional lenders often take time.
When applying for a loan from a traditional bank, don’t expect to get ahold of the money quickly.
You’ll need to get approved first. And some loans will take weeks to get approved.
However, alternative financing offers a much faster process since time is crucial for your business’s growth.
You’re rejected in traditional financing
Banks reject 73% of business loan applications. Fortunately, there are plenty of alternative funding options for small business owners like you!
Alternative financing options like online lenders generally have less paperwork, making approval easier.
If you’ve recently been denied a loan, I wrote an article to guide you through the steps. Check out these steps for what to do when your business loan is denied.
You have no collateral
If you lack collateral, you can try alternative financing options to ensure that business loan.
Traditional banks may require valuable assets as collateral to ensure payments.
Generally, alternative financing providers don’t need collaterals or personal guarantees, so you won’t have to put your other assets at risk.
8 Alternative Funding Options for Small Businesses
Alternative funding is acquiring financing outside of traditional bank loans to help grow your company or gain capital.
Many of these alternative lenders exist online, and they might become beneficial for business owners who lack collateral, have poor credit, and have been turned down for loans.
Learning these alternative funding options can be difficult. However, it’s crucial to help you find the best and most suitable funding for your business.
- Crowdfunding
First on the list is crowdfunding.
A crowdfunding campaign is a great way to get funds to help expand your business.
Crowdfunding websites like Kickstarter and Indiegogo help business owners to collect donations from donors.
But you’ll need an effective crowdfunding business plan to achieve your goals.
What to include in a Crowdfunding Business Plan:
- Executive Summary
- Mission Statement
- Vision
- Market Research
- Promotion Plan
Also, remember that crowdfunding will take a long time. If you want to get funds quickly, try other alternative funding options.
- Business Grants
A business grant is money issued by the government (federal, state, or local), a company, or a philanthropist.
Business grants are essentially free money—you don’t have to pay them back. Their main focus is helping small business owners.
However, grants are generally harder to qualify for since they can have very specific eligibility requirements.
Usually, business owners obtain grants through the government or Small Business Administration, but this might be the most difficult process.
- Venture Capitalists and Angel Investors
Venture capitalists (VC) and angel investors specialize in funding startups.
Venture capitalists and angel investors are often confused, but they differ in many ways.
Venture Capitalists are usually large and established companies that want to invest in your business to help develop the company through direct participation in the operations.
On the other hand, an angel investor is typically an individual who’s willing to fund startups or businesses in their early stages that might not exhibit a growth rate required by a VC firm.
Getting that funding from an angel investor gives business owners a more personalized relationship and a much-needed mentorship for aspiring entrepreneurs.
- Pitch Competitions
Pitch competitions are a unique way to gain funding for your businesses.
These competitions are best suited for startups or small businesses working in an incubator.
This type of funding is great for established businesses that want to expand and gain exposure.
However, pitch competitions are regional or community-driven and rarely happen.
Business owners will submit their business plans to a panel of judges whore are also investors, like Shark Tank.
Business owners can win cash prizes and get support from businesses seen as smart or good investments.
- Invoice financing
Invoice financing or factoring allows businesses that regularly invoice other companies to manage their cash flow.
With invoice financing, the business can release the capital in any overdue or unpaid invoices.
The lender buys the unpaid invoices, freeing a percentage of the value.
The business owner will obtain the remaining balance when the client settles their account.
- Online Lenders
Online lenders like Bluevine or OnDeck are well-known online lenders that offer various loans with flexible qualification requirements.
Online lenders are among the best alternative funding options since they are easier than traditional bank loans and popular lending agencies.
The application process is simple and can be filled out online in just a few minutes.
- Microfinancing
Microfinancing or microloans are small loans given to business owners or entrepreneurs who lack collateral.
Microloans sometimes have certain spending restrictions but usually cover operational costs and working capital for equipment and other supplies.
- Peer-to-Peer lending
Lastly, peer-to-peer lending, also called social lending, is a type of alternative financing that allows individuals to borrow and lend money to and from one another.
Peer-to-peer lending is like a combination of crowdfunding, loans, and an angel investor, to make it easier to understand.
Sites like Funding Circle are great pitching services that help connect you with potential investors.
Alternative Financing Options For Small Business: Final Thoughts
Expanding a small business will be costly.
Business owners need financial assistance to achieve their goals and grow their businesses.
However, getting approved for a loan from traditional banks and lending agencies will not be easy due to complicated qualifications and requirements.
That’s where alternative financing options come in handy!
Lenders often classify startups or small business owners as high-risk due to their lack of assets and limited credit history.
Traditional loans will also take a while before you get a hand of those funds.
But entrepreneurs can now achieve their goals much quicker with alternative financing options such as crowdfunding, business grants, angel investors, and other online lenders.