Small businesses such as startups do not usually get to be qualified for traditional bank loans. Good thing there are now several options for entrepreneurs in getting the funding that they need without having to go to the bank for financing. In this article, we will look at the alternative ways to get the loans for your small business.
How to Get Small Business Loans
Make Use of Your Retirement Savings
With the right assistance from professionals, you can take advantage of your retirement savings in starting your small business. You can even prevent getting any disbursement taxes and early withdrawal penalties. Basically, what you are going to do is that you will be buying stock in your company using the funds from your 401K/IRA, holding that stock in your retirement account.
You can make use of ROBS or Rollover for Business Startups. To do this, your company should be set up as a “C” corporation. If your company is already flourishing and has already started to make payments to its shareholders, your 401K will then get a part of those funds basing on the ownership percentage.
Your initial cost here will be around $5,000 and then for annual continuing fees, it will be $1,500. ROBS lets you invest funds using your retirement savings for your small business without the cost of paying for income taxes of early withdrawal penalties.
Peer-to-Peer Site Loans
P2P sites like the Lending Club issues personal loans for 3 to 5 years. Usually, the purpose of these loans is to be able to pay credit cards debts. But it is not limited to that purpose. Personal loans may also be used for your small business. Lately, P2P lenders such as the Lending Club have begun to offer loans for small businesses. However, these are usually for businesses that are more established.
If you want to borrow from P2P sites, you should remember that to be qualified. You should have a good credit rating, at least 650. If you do get the loan, make sure to pay it back because if you do not, your credit rating will be affected and it will have an effect on your future eligibility for other loans.
As for the interest rate, it depends on your credit rating as well as the length of the loan. It can range from about 12% to 25% annually. It is almost similar to the interest rates you will get when you pay using a credit card. However, unlike using a credit card, this one is in lump sum. What this means is that you will be getting access to all the cash in a bank account. However, the same goes in paying for the interest. You will have to pay the full amount right away.
Your cost in this type of loan will be a 1% to 6% origination fee; this will be taken from the upfront lump sum. And another 5% to 26% interest rate. With the Lending Club, you can borrow up to $40,000 from other people, mostly would be complete strangers. That’s why it is called “Peer to Peer” or P2P loans.
Take Advantage of Your Credit Card
A lot of people would warn you about using credit cards for your business. However, the National Small Business Association established that there are about 37% of small startups that use the credit card in financing their business. This is because it is a cost-effective way to do so. The average rate is 16%. There are even credit cards that give a zero percent interest when they have promos. This is a great way to take advantage of your credit card and borrow without having to pay for any interest.
Credit cards also have cash back and rewards programs. This allows you to earn money by charging the purchase to your credit card. You can even earn up to $500 or more in this program. You can do this just by signing up and making purchases up to a certain amount within the first few months. Responsible handling of your credit card will allow you to build business credit. A good business credit lets you be qualified for other business financing at even lower rates.
Your cost for this kind of loan from your credit card will be around 16% for the average annual interest rate. In addition to that would be $50 to $100 in annual fees.
Go to Venture Capitalists
What venture capitalists are are investors who look for a high-rate return for their investments. They generally look for around ten to fifteen times return of their initial investment within five years. However, most of the small businesses cannot give a guarantee that they will achieve a high rate of return. That is why there is a challenge when it comes to matching the startup with a venture capital funding.
However, for those who have high hopes for their business and are confident that they will be able to produce the returns, then you should try to go to venture capitalists to seek out funding.
Use Crowdfunding to Get Funds
Crowdfunding is exactly what its name suggests. It is when you get to raise small amounts of money from a group of people. Some of the examples of crowdfunding are the websites such as gofundme and Kickstarter.
There are several ways to crowdfund, some rely on the strengths of the business while other give out incentives to those who support in exchange for the investments they provide. Other businesses offer their shares to those who support them through investments.
The cost here will be about 5% to 10% of the money raised plus the offered incentives such as shares of the business.
Go to a Non-Profit Lender for a Microloan
Non-profit lenders such as Accion can be found nationwide. It provides microloans for small businesses like startups. This non-profit lender can give loans to incubator-baser or home-based startups that want to get off the ground. However, a challenge here is that they will only lend to those who have enough cash flow to make sure that the business will be able to make the payments for the loans.
Another thing is that you should be able to have a cosigner or a source of income separate from that of that business itself. An example of this is a full-time job or a spousal income.
Remember that if your credit score is under 640, you may not be approved for the loan. Maybe you should spend some time working with your company and repair and build it. If you continue to ignore your low credit score, this can hold back your business for years. The cost of this kind of loan is around 18% to 35% for the annual interest rate.
Get an SBA Loan for Your StartUp
The SBA is commonly known for giving loans to businesses that are more established. However, they do have programs that are for underserved businesses, included here are startups. These programs are the Microloan Program and the Community Advantage Program.
With the Community Advantage Program, you get to borrow up to $250,000. With the Microloan Program, you get smaller loans at around $50,000. With these two programs, the lender in not the bank but it is the SBA-approved intermediary. This is a CDC or a non-profit institution.
The SBA loans are usually available for those businesses that are self-financed, meaning the owners have invested at least 30% of their money for their startup. They also prefer businesses where the owners themselves have experience in the management and the industry. One great benefit of an SBA loan is the lower interest rates that it offers compared to the rest. Like any other loan, you will need a good credit score, above 680.
There are several ways that you can get a business loan without having to go to a bank. What is important is to make sure that any agreement that you come across should be in writing. Make sure that you do a lot of research so as to make sure that all the institutions and processes that you will be dealing with are legal.
Don’t forget to discuss with your family any business venture so as to know what you and your family are willing to put at stake so as to launch the business. You should also hire an accountant or a financial advisor to guide you as your discuss your plans.
Once you get the ball rolling with your business, there will be a lot of temptation to put more money in. However, you ought to put a limit so you can be disciplined with handling your money and your business.
You should also be honest with yourself if you see that the business is unsalvageable and you would need to shut it down. You should know when to do this before you start to lose more and more money.
But don’t let that scare you into building your own business. It is important that your business goals are clear to you and that you have realistic expectations from your startup. Hopefully, the seven options for business loans will give you an idea on how to get one.
Allegra Gallian is an author through and through. She writes on a variety of topics from health and wellness to business ideas. Currently, she works with Strive Lending, a veteran owned and operated mortgage lender offering help from veterans to veterans. 🙂