Running your own business isn’t easy, especially when it comes to finding funding. You don’t have a board of directors to lean on for guidance on how best to scale up, or an entire department devoted to managing your business finances. You need to figure out a lot of things on your own, and that’s fine – the most successful entrepreneurs are the ones who know their market and trust their instincts.
But there are a few simple rules that pretty much everyone agrees on about achieving business success:
- Businesses have to grow to survive.
- You need money to grow (or sometimes to sustain growth)
- It’s really hard for small business owners to get funding from traditional lenders.
Here are 8 things you need to know about traditional business loans and alternative funding sources.
1: Why Banks Say No to Small Businesses
It’s no surprise that you probably can’t get a traditional loan if you have a low personal credit score. But there are plenty of other reasons that banks may think it’s too risky to lend to you. These include lack of collateral, a seemingly non-realistic business plan, being part of an industry that banks think are risky (including restaurants, travel, and consumer financial services), and not asking for enough money - bigger loans are more profitable for banks.
2: Getting a loan takes a lot of time
Even if you meet the criteria above, you’ll need to devote a lot of time to preparing your loan application. Banks need a lot of documentation to evaluate whether they want to approve a loan. Figure on spending about 30 hours in total to gather the information. And since most small business owners are typically working around the clock to keep the company running, that’s a big investment of time with no guaranteed payback.
3: You’ll need more collateral than the requested loan amount
Collateral is assets that can be seized and sold to recover the lender’s money, if you default on the loan. Since the lender usually won’t be able to get the full value of your collateral when it is liquidated, your $70,000 loan may require $100,000 in real estate collateral. If you’re securing the loan with something like inventory, you’re likely to get only 50% of the actual value of your inventory – so a $50,000 loan would require at least $100,000 in inventory as collateral. And if your business is new, or you don’t have a perfect credit score, you’ll have to provide more collateral.
4: If you’re approved, you’ll have to wait
Plan on waiting 60-90 days from the day you apply for a bank loan to the day funds are available in your business account.
5: Look online for small business funding alternatives
Alternative funding sources provide working capital and other forms of financing for small and medium-sized businesses whose owners need to access funds quickly and/or don’t qualify for more traditional loans from a bank. They tend to be far more flexible than banks and credit unions. For example, an alternative funder may work with businesses that have revenues as low as $5000 a month. Business owners don’t need to have perfect credit scores to be approved for funding. Plus the application process for alternative funding is likely to take minutes, not months. And the types of funding available, such as invoice factoring and merchant cash advances- are designed to meet the needs of smaller businesses.
6: Alternative funding is challenging traditional financing
A report by investment banking firm Morgan Stanley states that “We believe that alternative lending is here to stay. Indeed, we expect its growth trajectory to continue, reflecting the potential benefits of the asset class to both borrowers and investors. Positioning investors at the intersection of technology and finance, alternative lending may provide diversified exposure to a secular shift in the way that consumers and small businesses access capital. their lending to small businesses.”
7: Merchant Cash Advances aren’t just for merchants
Typically, merchant cash advances were available to small businesses such as stores or restaurants that were paid primarily by credit or debit card. Funders were paid back directly from payment card receipts. MCAs can now be paid back by remitting the agreed upon percentage from a business bank account through ACH (Automated Clearing House) withdrawals.You no longer need to be a “merchant” to get a merchant cash advance.
8: It's never been easier to qualify for small business funding
One Park Financial works to help owners of small and mid-sized businesses access the funding that meets their needs. Established in 2010 and founded by entrepreneurs, One Park Financial understands the challenges associated with small business loans and their need for working capital. Visit oneparkfinancial.com or call 855.218.8819 and connect with a funding expert to discover the options that make sense for you and your business.