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Declined for a Small Business Loan: Now What?!

Phil Cohen

It’s no secret that banks are notoriously hard to get loans from.  They can deny your request for a variety of reasons, some of which may not have anything to do with low cash-flow. Maybe your business has only been open for a year and you’re actually doing really well! However, doing really well and being ready to expand business operations can be two different things.  Expansion might mean long-term success and notoriety, but it also means more working capital is necessary up front. If the bank won’t dish out, does that mean you’re doomed to wait until you have enough money to grow? Not necessarily.  While obtaining a bank loan is probably the most ideal option, it’s not realistic for all small businesses. Alternate financing methods are becoming more and more popular as entrepreneurs need other options.

Invoice Factoring: Never heard of it? Not surprising. Factoring is actually a centuries-old practice, however, somehow along the way it’s gotten lost in the shuffle of available financing options.  Invoice factoring is a process in which a factoring company buys outstanding invoices from clients and then advances them up to 95% of the total amount. This purchase, and therefore cash, enables companies to continue or expand operations, and the factor then collects the outstanding invoice amount from the third party debtor. Often confused with a loan or a collections agency, factoring is neither. A small fee is charged to factor invoices; however, the invoices are tangible assets that factoring companies purchase. There’s no amount of money that the customer has to pay back to the factor and no further debt is incurred.  Invoice factoring is an ideal option because it puts control (and money!) into the hands of your company and you aren’t liable to a bank or other lender.

Merchant Cash Advance: Still a viable lending option, however, a merchant cash advance will (literally) cost you—in this case, daily. MCA’s are non-bank lenders who advance the borrower cash, but in return, borrowers must oftentimes pay a fee, as well as directly ‘donate’ a percentage of their daily credit and/or debit card purchases back to the lender until the advanced amount is met.  MCA’s can often be obtained quickly; however, their rates are traditionally higher than standard business loans. Borrowers with lower credit scores are more likely to qualify, as long as their projected sales forecast looks positive. This can be especially beneficial for small businesses that tend to have seasonal highs and lows—more of the advance can be paid off during their busy season, while less would be collected when sales volume is low. Learn more about merchant cash advances.

Peer Lending: In a nutshell, multiple wealthy investors put up the capital for individual loans, therefore axing banks out of the equation all together. A mutualistic relationship, rates for borrowers tend to be lower, while investors generally benefit from the returns and gain a monthly cash flow. Companies such as Lending Club and Prosper offer loans to individuals, whereas Funding Circle has ventured into the peer-to-business lending.  While lenders only cover a portion of the total requested funds (so they won’t lose the entire amount if a borrower defaults) they still get to be selective about the loans they take on—once again meaning that if you have bad credit or your business isn’t an ideal candidate, you might be out of luck.

Crowdfunding:  Crowdfunding is the new-kid-on-the-block in terms of funds sourcing, yet is gaining popularity. According to Fortune magazine, crowdfunding exceeded $5.1 billion dollars in 2013 and isn’t expected to stop anytime soon. The premise is simple: have something you needed funded? Pick a crowdfunding site, such as gofundme.com and turn to the internet in hopes that others will support you and your idea (by means of handing over some George Washington’s). With the onslaught of social media in everyday life, crowdfunding is able to reach more people than ever—funding everything from fertility and cancer treatments, to travel and new cars, to musician and artists’ new projects. In 2014, Zack Brown raised $55,492 to make potato salad on Kickstarter.com.  The catch? Most sites take a small percentage of each donation, as well as charging a processing fee. Additionally, some sites are “all or nothing” platforms in which individuals needs to earn their entire funding goal before it will be officially ‘backed’ and you can receive the funds for your project.

Fortunately, as the small business market grows, so too will the options available for funding. Whether you’re looking for the cash to start your dream company or you’ve hit a couple bumps in the road, there are choices you can make as an entrepreneur that best suit your business needs to ultimately succeed. It’s crucial to do your research and shop around.  Most importantly–have faith. If someone can get almost $60k for potato salad, then surely you can find a way to get the cash you need!

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Phil Cohen

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