While the Great Recession had traditional banks tightening their belts when it came to small business loans, alternative lenders emerged to fill the void. Nowadays, small business owners can use a variety of other sources, like alternative lenders and crowdfunding, to start and grow their businesses.
And now, in light of the COVID-19 crisis, some business lenders are no longer processing certain loan applications. The following list offers multiple financing solutions that small business owners can explore to access the funding they need.
The coronavirus pandemic has made financing struggles all too real
The COVID-19 crisis has created new challenges that have left many small business owners wondering how they will stay open. To cope, many small business owners turned to the Paycheck Protection Program (PPP), a special loan under the Coronavirus Aid, Relief, and Economic Security Act that helps small business owners retain their employees. Despite the financial support, survey results showed that only 10% of PPP recipients were able to relieve their financial hardship completely.
6 ways to find funding for your small business
If your business has taken a hit from the pandemic, or if you’re just looking for some additional capital, the following small business financing solutions can help you secure the funds you need to start and grow your company — or in these uncertain times, keep your doors open for business.
Traditional bank loans
Traditional bank loans with their competitive rates can still be attractive among small business owners. However, you can explore many other funding options if you do not qualify for a traditional bank loan.
- Flexible capital purposes. Some financing options, like equipment financing, restrict how you spend the loan. General loans from a bank, in contrast, can fulfill many capital purposes. For instance, you can use a traditional unsecured business loan for business expansion, repairs and even facility remodels.
- Competitive interest rates. Traditional bank loans often feature competitive interest rates that keep costs low. Compared to alternative lending products, which can carry APRs higher than 20%, bank loans tend to be a more affordable financing solution.
- Collateral may be necessary. Some bank lenders may require collateral, such as commercial equipment or property, before approving your application. If you cannot repay the loan, the lender may recoup their costs by exercising their right to claim the collateral.
- Difficult for new entrepreneurs to qualify. Startups can be risky, and lenders may be hesitant about lending to a new entrepreneur with little to no business experience. Therefore, some bank loans may require two to three years of time in business.
If the requirements for a traditional loan are too rigorous, consider nonbank and online lenders. These alternative lenders typically have lower eligibility requirements and offer various financing products, including lines of credit, merchant cash advances and invoice factoring.
- High approval rates. Alternative lenders often have lower requirements, such as less time in business and no collateral required.
- Quick funding. Some alternative lenders provide financing as quickly as in one business day. This easily outpaces some Small Business Administration (SBA) loans where funding may take up to 10 business days.
- High interest rates. The Federal Reserve Board and the Federal Reserve Bank of Cleveland conducted a study in 2018 and found that over 50% of online lender applicants experienced high interest rates. The lower minimum requirements and convenience of alternative lenders often pair with higher interest rates when compared to a bank or credit union.
- Less flexible repayment terms. Repayment terms may vary, but some alternative lenders may require a more frequent repayment schedule. In some instances, borrowers may be required to make weekly or even daily payments.
Business credit cards
If your capital needs are low to moderate, business credit cards can be a flexible financing solution. According to the National Small Business Association’s 2017 year-end economic report, 31% of the 1,633 participants reported using credit cards to meet their capital needs.
- Build your business credit. If you’re a new small business owner, a business credit card can help you build your business credit score. As you grow your business credit score, your likelihood of securing a business loan in the future improves.
- Rewards. Business credit cards may offer attractive incentives and rewards. For example, a business card that offers discounts on hotel bookings and transportation can be a welcome perk if you frequently travel for work.
- Additional fees. After the introductory interest-free period that many credit card companies offer, you may be subject to high APRs, annual fees and transaction fees.
- Fewer consumer protections. Adding to the previous point, business credit cards don’t enjoy the same protections against rising interest rates and fees that personal credit cards do.
Borrowing against your home
A home equity loan — also called taking out a second mortgage — lets you borrow against the equity built up in your home. You can use a cash-out refinance calculator to estimate the amount you can borrow before reaching out to a lender to get a sense if this is a realistic option for you.
- Fixed monthly payments. Many home equity loans offer fixed rates, which means you will pay the same amount regardless of rising or falling interest rates. This can add predictability to your monthly expenses.
- Lower borrowing costs. Since your home serves as collateral, a home equity loan may feature lower rates than unsecured loans.
- Your home is collateral. Your home serves as collateral in this type of loan, and you risk losing a roof over your head should your business flop. If you fail to repay your loan, the lender can seize your home to recoup their loss.
- High credit score requirements. Some home equity loans may require a minimum credit score of 740. If you have low or fair credit, you may still qualify for funding, but you will likely be subject to higher interest rates.
Borrowing from friends and family
Although borrowing from friends and family may help you skip the tedious loan application process, be sure to weigh the pros and cons before making your request.
- Favorable rates. An incredibly kind and generous friend or family member may give you a loan with little to no interest.
- No credit pulls. Friends and family members may not ask to review your credit report before lending to you, saving your credit report from a hard inquiry pull.
- Strained relationships. Failing to repay the loan may lead to regret and resentment and possibly cause your relationship to sour. Signing a written agreement can help set clear expectations among both parties.
- Small loan amounts. A recent survey of over 1,000 Americans showed that only 6% of participants would lend more than $10,000 to a family member — that percent is halved to 3% when lending to a friend.
Small business owners can create crowdfunding campaigns to raise funds from a large number of people. A study conducted by the SBA found that the average amount raised among 105 campaigns in 2017 was $289,000.
- Low risk. Unlike a traditional loan, there is no guarantee that campaign contributors will get their money back. If your business flops, you typically are not obligated to repay the funds you raised.
- No minimum time in business required. Unlike bank loans that often require a minimum time in business, many crowdfunding sites do not enforce this requirement before starting a crowdfunding campaign.
- Pay a percentage of your funding total. Some crowdfunding sites, like Kickstarter and Indiegogo, may charge as high as 5% of your funding total.
- All-or-nothing funding. Some crowdfunding sites do not release the funds you raise unless you meet your funding goal. You could potentially spend significant time and money campaigning and testing your product and not raise any money.