Alternatives to fast business loans
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If your business is in need of quick cash, your first instinct might be to apply for a fast business loan. These typically come from online lenders specializing in quick, automated approvals and next-day loan funding.
But fast business loans have a variety of drawbacks. With less-than-perfect credit, you could face high rates and loan fees. And even with strong credit, the repayment term or borrowing limits might be less than ideal when compared to traditional loans from banks and credit unions.
If you find that fast business loans aren’t what your company needs, or you just want to explore other options, here are the best alternatives to fast business loans.
Traditional business loans
Traditional business loans are loans that aren’t focused on the speed of approval and funding. While you can get a traditional business loan from an online lender, they’re more typically offered by banks or credit unions.
The benefits of traditional business loans include larger loan limits and more flexibility with repayment terms. They may also have lower interest rates and fees, especially if your company doesn’t have a great credit score. But they may have stricter requirements than alternative lenders.
Getting a business loan and receiving the funds can also take much longer. If the lender uses a manual underwriting process, it could take days to a week or more before the lender makes a decision. After that, disbursing the funds to your business bank account could take a few more days.
SBA loans are regulated and partially guaranteed by the Small Business Administration. You apply for them through banks, credit unions or online lenders. These lenders then submit paperwork to the SBA to ensure it meets the SBAs standards.
The biggest disadvantage of the SBA loans is that it takes a long time to receive funds — anywhere from 30 to 90 days. But the wait can be worth it for anyone who qualifies, as SBA loan rates and terms are generally more favorable than other types of loans.
There are many types of SBA loans, including 7(a), microloans, Express loans and 504 loans. There is even a pilot program that offers loans for a limited time. The SBA Community Advantage program provides loans to underserved communities but is expected to expire on September 30, 2024.
Bootstrapping means funding your company yourself. Instead of turning to a lender or other investors, you use your personal savings to cover the company’s expenses.
This is common for new business owners who are just starting out but nothing is stopping you from investing in your company at any point throughout its life. Bootstrapping can also refer to using the company’s own funds to cover expenses and pay for growth.
There are three main stages of bootstrapping:
|Beginning stage||This is when you’re first starting your company. You use your personal funds to get the company off the ground.|
|Customer-funded stage||Once your company is more established, it should receive revenue from its customers. At this stage of bootstrapping, the company reinvests that revenue into the business’s operations or growth.|
|Credit stage||During this stage, your company can fully support itself through the revenue it earns. This is when you begin turning to outside sources of funds, typically loans, to grow the business further.|
The early stages of bootstrapping allow you to avoid debt and retain more control over your business. But if you don’t have sufficient revenue or personal savings to put into your company, you won’t get very far through bootstrapping.
Business grants are funds that you can use without any expectation of paying them back. Given that they’re free money for your company, the application process can be highly competitive, so relying on them is hard if you’re in a financial pinch.
That doesn’t mean they aren’t worth applying for. Many governmental entities, from the federal government to your local city, might offer grant programs. There are also grants from larger businesses and nonprofit organizations.
Some grant programs have specific eligibility requirements, such as operating in a certain industry or providing employment in a specific area. Others focus on specific demographics, like veterans, women, or people of color.
Keep an eye out for grant programs in your area. If you see one you qualify for, take the time to apply. They can offer a valuable infusion of cash into your business.
Crowdfunding is a method of fundraising that relies on getting a small amount of money from many different people. If you convince 100,000 to each give you $1, that’s $100,000 for your company to use.
There are a few different types of crowdfunding you can try.
Donation crowdfunding is one of the most common crowdfunding methods. You ask people to help you out by donating some money. There is no expectation that donors receive anything in return and very little paperwork or bureaucracy to deal with.
The drawback of this method is that you’re relying solely on the goodwill of donors. You aren’t offering any incentive to donors, so these campaigns often fall short of their goals.
Reward crowdfunding is an option for business owners that want to provide something to people who choose to help with their crowdfunding campaign. It’s a popular way for companies to pre-sell a product, getting money upfront and using those funds to produce it.
For example, you might want to design and sell a unique backpack. You can start a crowdfunding campaign and promise to ship a backpack to anyone contributing at least $50. People that contribute more might get additional perks or rewards.
Reward crowdfunding campaigns are the most popular type of crowdfunding out there. Campaigns typically last between one and three months. Companies looking to sell a tangible product to consumers tend to do best with these campaigns.
Equity crowdfunding is relatively rare, but with the passage of the JOBS Act, it has become a viable option for some companies.
With equity crowdfunding, you sell a stake in your business in exchange for funding. You can set investment minimums or maximums and work with potential investors to raise funds.
Equity crowdfunding is useful if you want to raise a large amount of money, but it is far more complicated than donation or reward-based campaigns. The process can take many months and you’ll need to have a strong business pitch to attract investors.
Another drawback is that you must be ready to deal with government regulations and SEC rules regarding equity sales.
Debt crowdfunding involves raising money with the promise that you’ll pay the money back over time. It’s like getting a normal loan but raising funds from many lenders.
The advantage of debt crowdfunding is that you can raise money more easily than donation or reward crowdfunding, especially if you’re offering a reasonable return on the loan. It also lets you avoid giving up equity in the business.
Campaigns are also relatively quick, lasting about a month.
The drawback is that you’re putting your business on the hook for the loan payments. If your company struggles to turn the loan proceeds into higher revenues, it could have trouble repaying the loan.
Peer-to-peer lending involves borrowing money from other everyday people rather than from a traditional or online lender.
While some peer-to-peer business lenders are out there, most peer-to-peer lending sites focus on personal loans, so you might have to take on some personal risk if you want to fund your company this way.
The benefit of peer-to-peer lending is that it can be easier to qualify for than other types of loans. Because your loan is funded by dozens or hundreds of people, each lending a small amount, they won’t be as worried about the risk of default as a single lender offering you a loan of thousands of dollars.
Most peer-to-peer loans come with high fees and interest rates to compensate for default risk and offer an attractive return to investors. There’s also no guarantee that investors will be willing to fund your loan or do so quickly, meaning the process could take much longer than other types of financing.
Microloans are loans for small amounts of money. Depending on the lender, the limit can range from a few thousand dollars to as much as $50,000.
The SBA microloan program, for example, offers loans up to $50,000. Rather than coming directly from the SBA, the SBA makes these loans through nonprofit, community-based lenders.
Each lender sets different rates and terms, but the loans tend to have relatively low interest rates and can have long repayment terms, helping keep the monthly payment affordable.
Other entities, including local governments or community groups might also offer microloan programs, so keep an eye out for opportunities in your area if you think a microloan is right for your business.
Business credit cards
Business credit cards are a popular tool for almost any business owner. They make it easy to pay for everyday expenses on credit, financing those purchases for the short term. If you don’t carry a balance from one statement to another, you won’t have to pay interest. But you do have the flexibility to carry a balance for a longer period if you desire.
Some cards even offer extended 0% APR periods when you sign up. This perk lets you make purchases or transfer over debt from a high-interest card and make interest-free payments for a certain amount of time.
If they do charge interest, card rates tend to start higher than traditional loan rates, especially if you have strong credit. But they could be cheaper than other business loans if your company has poor credit and needs to turn to alternative lenders.
Business credit cards also offer other perks. Many offer rewards in the form of cash back, points, or miles. Depending on the card, you might get as much as 5% or more back on every eligible purchase, which can translate to a big savings for your company.
Other benefits may include automatic loyalty status with airlines or hotel chains, access to unique events, complimentary rental car or travel insurance and more.
Fast business loans from alternative lenders have pros and cons. They can help when your company faces a cash crunch, but you pay a premium for speed. If you’re not pressed for time, or want to explore alternatives, there are many other ways for your company to raise money.
Frequently asked questions
If you have poor credit, the easiest type of business loan to get may be a secured loan, such as an equipment loan. What you’re buying serves as collateral for the loan, reducing the lender’s risk. Other options for bad credit business loans include merchant cash advances and invoice factoring, but these loans may have higher interest rates and fees than other types of loans.
Each lender sets its own eligibility requirements for borrowers. Many banks will want your company to have at least a few months of operating history before getting a loan. Some might ask for at least 24 months in business. If you’re a startup, an SBA loan, crowdfunding, or microloan might be your best bet.
The amount you can borrow through a business loan depends on a few factors, such as your company’s credit rating, revenue, and expenses. A common rule of thumb is that lenders will let you borrow as much as 10 percent to 30 percent of your annual revenue, assuming you can make the required payments.