Alternative business loans are as common as hamburgers. They’re everywhere and they come in an endless array of styles and flavors. They’re often quick and easy to get when compared with SBA financing. But if you’re not careful, they can be expensive.
The story of American capitalism is largely the story of alternative business loans. New companies and stores often cannot qualify for traditional bank loans because they’re stuck in a financial loop. When you just start out there are no sales to prove your idea will work. There’s no inventory because there are no funds to buy goods. Because you can’t buy in bulk there are no economies of scale. Machines, facilities and employees can make your enterprise more productive but who can pay for such costs without sales?
As to loans insured by the Small Business Administration, forget it. You need to have a track record before you can get financing. The good news is that there are many sources of alternative business loans that can help get you started.
Whether you seek money from the biggest bank in town or Aunt Martha, you’ll do better having your story, your facts and your numbers in hand.
Check your credit report. Credit report errors and out-of-date items can lead to lower credit scores and that can make it tough to get financing. You can get a free copy of your credit report at AnnualCreditReport.com.
Save your money. People might love your idea but they’ll love it more if you put up some cash. Skin in the game can also include the money you’ve spent to date, the value of equipment and inventory, etc.
Assemble your documents. You want to have lots of paper. Tax returns. Organizational papers such as licenses, corporate filings and partnership agreements. Media coverage. Patents. Copyrights. A resume. And — crucially when you’re seeking money — a business plan.
The starting point for any enterprise is to write out a business plan. There are many online examples. You can find free samples from such sources as the Wharton School of Business, The Harvard Business School, and the Small Business Administration.
At this point you may be thinking, hey, I want to start a food truck or a computer repair service. Who needs this stuff?
You do. Here’s why.
You’re trying to raise money. You have to speak in the language that people with money use. If you can’t explain your idea on paper and in terms lenders understand, you won’t get financing.
You want a team to help with your business plan — and your business. You at least want an attorney and certified public accountant (CPA). Such professionals, of course, cost money. But the good news is that sometimes professionals will provide pro bono (free) help to get you started. Or maybe a discount. Why? They want your business as you grow.
In addition, it’s great to have mentors, people who will help you informally. Want to open an online retail store, a plumbing business or a software firm? Speak to people already in those businesses. Another good resource is SCORE. This is a non-profit which offers (generally) free mentoring services through 300 chapters nationwide. SCORE also has a good business plan template.
Lastly, a good source of information is 1 Million Cups. This is essentially a localized, informal version of the Shark Tank TV show. Over coffee, entrepreneurs present their ideas. People in the audience comment pro and con. It’s a place to meet potential investors and lenders. Most importantly, anyone can attend meetings and watch the presentations. Hearing others is a great way to improve your pitch.
It might seem as though a loan is a loan. This is not true. If you get a consumer loan, say a mortgage or auto financing, there are rules in place to protect your interests.
This not true when it comes to business financing. The thinking is that if you get business financing you’re a “sophisticated” borrower and have the ability to protect yourself. Be smart, and do not sign up for any business loan without having it first reviewed by an attorney and CPA.
A co-signer is someone with cash and credit. You get a financially-established friend or relative to speak with the bank. They co-sign the loan. Because you have a co-signer, there’s less risk to the bank. Your interest rate is lower. You can get a bigger loan.
The catch? The bank wants its money back. With interest. On schedule. They are very picky about this. If the bank is not repaid on time and in full, they will come after you and your co-signer.
Among the ream of papers you signed are documents allowing them to take your business, sell it, and sue you for any unpaid balance. If you pledged your home or car as security they’re on the line. They can be lost.
The co-signer — having cash and credit — knows this. In exchange for the use of their financial capacity, they might want something in exchange. Maybe a piece of the business. And interest.
Rather than going to a commercial lender, it sometimes makes sense to get financing from friends and family. This approach can be attractive if five tests are met.
Do not see friends and family as less-important than other creditors. This attitude has destroyed many a friendship or family. make up your mind now to put them at the top of your list every month.
Personal loans are a simple form of financing. They are unsecured. Your house or car are not collateral for the loan. You borrow a lump sum and then make monthly payments until the loan is repaid.
Personal loan interest rates range from under 6% to 36%. The better your credit score, the lower your interest rate.
Kickstarter has emerged as a go-to financial platform for entry-level entrepreneurs. You tell your story and offer rewards to attract contributors.
Kickstarter uses an all-or-nothing funding model — you pick how much you want to raise within not more than 60 days and collect only if your target is reached. The site takes a 5% fee if your goal is met. There’s no interest to pay, no application, and no one checks your credit. The trick is to have an enticing story and rewards which have value for supporters — according to PC Magazine, only about 44% of Kickstarter projects get funding.
“Factoring” is a form of business financing that originated in the garment industry. In basic terms it works this way: You have a business. The business has an income. You use your business income to secure a loan. The lender collects your accounts receivables, takes a percentage, and remits the balance to you.
Rates generally range from 1.15% to 4.5% for 30 days. Advances usually range from 70% to 85%. It’s more of a short-term cash flow solution for an existing business than a long-term financing for a startup.
One way to raise capital is to pledge business equipment to secure financing. This can be done by purchasing the equipment on credit or by obtaining a loan secured by equipment you own. Since this is secured financing, you should expect to pay a lower rate you might pay with unsecured financing.
Google shows more than a billion listings for the term “online loans.” There are a lot of online lenders, and some of them are simply payday and title lenders.
Be careful: while the Consumer Financial Protection Bureau has established a “small dollar rule” to govern online lenders, regulations apply to consumer credit and do not include business loans. If an online loan — just like financing from a brick-and-mortar lender — seems interesting, review the costs and terms with an attorney or CPA before signing.
One of the cheapest sources of money is home equity financing. Interest rates are currently under 5%. However, putting your home on the line to start your business could have dire consequences if your entrepreneurship dream doesn’t pan out. note that this could happen through no fault of your own, but your mortgage lender won’t see it that way.
Considering the failure rate of new businesses (about 50% in five years according to the US Department of Labor Statistics), you might want to keep your home and business financing completely separate. The safety that comes with an unsecured loan like a personal loan or other alternative business loan is probably worth its extra cost.
This content was originally published here.
© 2019 Working Capital Group, LLC