Small Business Funding When the Banks Say NO!

While banks may arguably be the best or at least the most convenient source of small business funding, they are not the only option. If your business has been turned down by the banks, then you can find alternate sources of funding that may work just as well, if not better than receiving a loan from a bank.

How to Determine If Alternative Business Funding Works for You

You will need to consider several issues before searching out small business funding sources that go beyond the bank. This means that you will need to take the following into account.

Shape of Your Business: Can your company hold up to intense scrutiny. If you had tax issues, lending problems, and other trouble in the past, that will not look well when applying for any loan, alternative or not. The better off your business, the more likely you will receive a loan.

Control of Your Company: Many lenders want the owners of the company to hold at least a 50% share. This means if you only hold a tiny amount, you may have to search for other forms of lending.

Size of Business: The larger your business, the more likely you are to obtain alternative business funding sources. This helps if you can find sources that specialize in your industry. The size of the business is important because it reflects the potential success you may enjoy which in turn provides greater security on paying back the loan.

Other factors include how much outside influence do you want in your business. How well you can handle paying off the loan. And what type of flexibility is needed for your business to still thrive under such conditions? What follows are two popular alternative methods when banks are either not lending or do not provide the flexibility needed to help your small business.

Small Business Asset-Based Lending

This form of lending works well for small businesses that need a flexible line of credit when they cannot receive a bank loan. Given the tight lending market even with the rising economy, this form of lending has become quite popular.

Essentially, asset-based lending is an agreement that secures the money needed through collateral. This means that the assets of your business which include the equipment, property, inventory, and accounts receivable are used to get a line of credit or a loan. This type of lending does have certain advantages, especially for small business owners that are looking to expand.

• Excellent for covering short term demands on cash flow
• Uses assets as collateral
• Best for liquid collateral assets as opposed to physical ones such as equipment

Arguably the best use of asset-based lending is when you need capital to cover an unexpected shortfall in payroll or to expand your business when you do not have the cash on hand to get it done. While the use of the equipment and other physical assets may not be all that desirable from the lender’s perspective since the value is difficult to judge, it is still possible which may make the difference for businesses trying to cover shortfalls in on-hand cash.

Having collateral that well exceeds the money needed means more flexibility in terms of the conditions of the loan itself. The main advantage is that interest rates on loans secured with assets are usually lower compared to unsecured loans. This is because lenders can recover their losses in case the loan defaults.

However, the more physical assets used for collateral, the less the loan is likely to be. For example, if you need money to expand your business and you have marketable securities that are highly liquid or easy to get full value, then a lender might give 80% to 85% of the total value of the assets for your loan. So, depending on the amount of money needed, you may have more than enough to garner an asset-based loan on what you own.

Of course, if more of the assets you have are physical, such as equipment for example, then the percentage might drop to 50% or even less depending on other factors. Still, you are looking at a favorable loan in terms of interest rates and the amount of time to pay it back when you go with asset-based lending for your small business funding.

Small Business Peer-to-Peer Lending

A good alternative business funding source is peer-to-peer (P2P) lending. This is when you receive a loan directly from an individual rather than a financial institution. The advantages of peer-to-peer lending are obvious since you are cutting out the middleman and going directly to the source.

Sometimes called social or crowdlending, this relatively new form of loans offers considerable advantages compared to traditional lending practices.

• P2P Lending Sites Connect Lenders to Businesses Like Yours
• Better Interest Rates and Conditions Compared to Most Bank Loans
• Investment-Oriented Lending

In other words, you are finding an investor or perhaps a group of investors that are willing to lend you the money with the idea that they will receive a sizable profit upon its return. Because you can negotiate directly with the source of the money, you avoid having to deal with many of the fees associated with traditional lending institutions.

A form of peer-to-peer lending called crowdfunding may offer a simpler way to fund a needed expansion and even help grow your business. Crowdfunding means getting many different investors who bring a small amount of money each. In return, you do not have to pay them back, but instead, you can offer alternatives such as discounts, free merchandise, or other benefits.

Still, one of the potential downsides is the fees associated with bringing you and the investor together, so you will need to be aware of that. That includes late fees on payments and the like.

Finding small business funding is no longer limited to the banks. You can find alternative business funding sources that provide the capital needed to help your business start or grow. You may be surprised by the number of options available, so be sure to do the research first before going to the bank for a loan.

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