Sidestep the Small Business Loan: 7 Alternatives to Traditional Lending

Small business startups typically require a significant initial investment to get their business off the ground, and many startup owners seek out a small business loan to offset those costs. Despite the uptick in small business lending, however, steep requirements can make a startup ineligible for funding or else lock them into a contract that ultimately threatens the financial health of their business.

Even loans through the U.S. Small Business Administration are fraught with unfavorable terms, such as the requirement to hold a 10-year lease or lease option on business property if the loan term is ten years or longer.

Fortunately, there are several alternatives to applying for a small business loan. Below, we present seven business-friendly financing options that you can choose to build your small business cash flow without a small business loan.

  • Funding from personal savings or family – If you have access to savings that you can invest in your business, you can avoid all of the strings connected to financing your startup operations. You will avoid paying interest on borrowed funds, and while you may miss out on earning interest on those savings you will be able to claim the money you invest as a business expense on your taxes.You can also tap into your personal network for initial financial support, either by selling shares as an investment or by entering a private lending relationship. Either way, make sure that you properly report any funds received from family and friends as a loan, share purchase, or gift.
  • Alternative lending – The alternative lending industry has gained a great deal of traction since the first wave of companies opened in 2007, and it now offers a financing option for companies that fail to meet traditional lending requirements but are averse to taking the cash advance route. These “midprime” loans have evolved from featuring terms similar to cash advance providers to mirroring their traditional counterparts – albeit with higher rates.New players in alternative lending, such as Fundation and Dealstruck, offer transparency to their clients, and may lend larger amounts at better rates for a longer-term loan.
  • Microlending – Microlending, or microfinance, is probably best-known thanks to non-profit microlender Kiva and its mission to finance small business owners in the world’s poorest countries. However, small businesses and startups in the United States can turn to the U.S. arm of Accion International for the funds they need to get their business off the ground.
  • Crowdfunding – We have previously discussed the benefits of crowdfunding for small business owners. While it is still incredibly competitive, startups with a compelling concept or a highly marketable product can attract individual investors to contribute to your company. Another way to encourage crowdfunding is to offer a benefit to investors at different levels – movie productions, for example, will offer production credit and gratis copies of the movie and merchandise, while companies marketing a product may create a package bundle that gives investors free access to the first run of products.
  • Angel investorsAngel investors are typically successful entrepreneurs who want to invest their earnings to help new small business owners establish their companies. These professionals choose their beneficiaries according to shared experience, affinity with the industry or type of company, and the people behind the idea. While they may take more of a risk on an idea than other types of lenders on this list, and certainly more than traditional lenders, they are also in search of startups that will provide them with a large return on investment. When you work with an angel investor, you will likely also get the benefit of their expertise – whether you want it or not.
  • In-house financing – If you need cash for a specific type of business investment, you may qualify for a line of credit directly from the provider. For example, you can finance tool purchases from companies such as Matco Tools and Snap-On, and pay a set amount toward the balance without accruing interest.
  • Invoice factoring – Of course, startups and other small businesses can use invoice factoring to steady their cash flow as soon as they have invoices to factor. Factoring provides ongoing access to funding within 24 hours as long as invoices are verified and the work has been completed. While factoring rates are higher than traditional small business loan rates, the flexibility of the factoring relationship and additional benefits make this alternative the ideal one for startups in any industry. 

Factor Finders offers invoice factoring services for startups and small businesses at every stage and in nearly every industry. If you want to learn more about the benefits of working with an invoice factoring company to utilize the small business factoring programs, then contact us to get started.

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