Three Alternatives to Small Business Loans - CNET

Three Alternatives to Small Business Loans – CNET

Banks and credit unions tend to offer the most expensive business financing, if your business qualifies. Only a fraction of small business loan applications are approved, and this disparity is growing.

According to the Federal Reserve’s 2022 Small Business Credit Survey, approval rates for both small and large banks declined from 2019 to 2021. Among small business owners who received at least some of the funding they looked for, small banks approved 8% fewer applications In 2021 compared to 2019, large banks approved 15% fewer applications in the same time frame.

However, many business owners still need capital to cover day-to-day expenses, especially as they continue to face economic challenges such as supply chain disruptions and rising inflation.

If you can’t get a traditional bank loan, you may be looking for other ways to finance your business. Here are three options to consider.

See also: 7 financial lessons from experienced entrepreneurs on the best ways your small business can spend and save

1. Online Lenders

Online lenders can offer a variety of small business loans and generally have more flexible requirements than bank lenders, although the cost of borrowing is usually higher.

And while banks and community financial development institutions can feel the pressure of economic transitions — such as the Federal Reserve raising interest rates — alternative lenders generally fill the gap in the market, says Josh Balkey, director of credit at Founders First Capital Partners, a San Diego-based small business lender that provides services Business finance and revenue based consulting.

Balkey says it is unlikely that alternative lenders will feel the same pressure as bank lenders or change their internal processes and methods for evaluating business loan agreements. These lenders may be less volatile because they generally charge higher interest rates than traditional lenders.

Many online commercial lenders offer simplified application processes, and some can provide financing in as little as 24 hours. To find the right lender for your needs, you need to consider factors such as the types of loans offered, eligibility criteria, speed of financing, and customer service, as well as interest rates and fees.

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2. Business support

To get free financing that you don’t have to repay, small business grants can be a good option. Business grants are available from federal, state and local governments, as well as private companies.

You can browse thousands of federal grants for small businesses at Grants.gov, which is administered by the Department of Health and Human Services. However, these scholarships often have very specific eligibility criteria, so you will need to review your qualifications before applying.

There are also local economic development agencies and companies tasked with promoting startups and creating jobs, says Hal Shelton, a small business consultant who serves the Washington, DC branch of SCORE—a nonprofit that provides free resources to youngsters. business owners.

Many of these local organizations offer business grants and even low-cost loans. For example, the Empire State Development Agency in New York offers a range of funding opportunities for small businesses, including the Global NY Grant Fund Program, which provides grants of up to $25,000 to New York-based businesses looking to start or increase their global exports.

While small business grants are great if you can get them to, applications can be competitive and time consuming. If you need faster financing, you’ll need to consider other options.

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3. Increased equity

If you have a loyal client base and a drive to market your business, you may want to raise money. With a crowdfunding platform, you can raise capital online – investors give you capital in exchange for an ownership stake in your business.

After Charles Alexander and his associates were unable to secure a bank loan for their business, The Black Bread Company, they decided that equity crowdfunding was a good option tied to their community roots.

The goal was to be able to make the lowest purchase of the stock, Alexander says. They wanted people to be able to invest in a business they knew well — let them be part of the growth and do it at a pace that almost anyone could be part of the journey, he says.

However, equity crowdfunding is not a quick and easy financing solution.

“It’s a long process when you release your company’s shares to the public,” Alexander says. He points out that business owners will need to ensure that they are following the guidelines and regulations issued by the US Securities and Exchange Commission.

Many equity crowdfunding platforms — such as Fundable, StartEngine, and Netcapital — offer a variety of support services to help business owners through the fundraising process. StartEngine, for example, provides small business owners with a dedicated fundraising strategist who works with them throughout their campaign and helps them with marketing and advertising strategies.

Preparing for a crowdfunding campaign can be frustrating, Alexander says. “But once we launched it was great. We literally raised about $660,000 in 30 days.

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In order to be successful in crowdfunding, you need to devote time and effort to promoting your business; And of course, you should be prepared to give up some ownership of your business.

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Randa Kress writes for NerdWallet. Email: rkriss@nerdwallet.com.

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