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5 Alternatives to A Traditional Business Loan

5 Alternatives to A Traditional Business Loan

A friend of mine recently needed $10,000 to expand the scope of her little coffee shop, one that was starting to receive more attention than she had ever hoped for. The $10,000 would go towards a central air conditioner unit, new furniture and the purchase of a POS system to help her manage her transactions better and quicker.

Now, the problem was that my friend had a spotty credit history. A failed prior business venture and repayment problems related to a loan for that doomed venture meant that seeking out a traditional business loan was simply out of the question.

When she asked me for advice, I introduced her to peer-to-peer lending and she quickly found a lender who believed in her and her business. Now, 3 months down the road since then, she has paid back almost 40% of that loan and is well on her way to financial freedom, thanks to the continued and heightened success of her now not-so-small coffee shop.

This friend has thanked me many times and has repeatedly said that she would have just let her business stagnate if not for my advice, after being denied a business loan from the bank that denied her. It then dawned on me that I should try to put the word out there, that a traditional business loan isn’t the only way to go about securing funds for a small business.

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Here are 5 alternatives to a traditional business loan, alternatives you can easily pursue.

1. Peer-to-Peer Lending

This is what worked for my friend. FundingCircle is a great site that connects potential borrowers with potential lenders. What is different about FundingCircle as a lender is that it allows individual investors and even institutional investors to fund your loan request. This means that someone who believes in your business can lend to you. In other words, your loan request isn’t looked at by loan officers but by people who actually take time to understand your business!

Unlike banks where your business is very objectively viewed, FundingCircle investors take a very subjective look at your application. For example, the investor who funded my friend’s loan request had a history of running his own coffee chop chain. He thus quickly saw the potential of my friend’s coffee shop, ran the numbers and worked out a $10,000 loan with great terms, for both parties!

Though FundingCircle connects you with a lender in a very unique way, the are traditional like banks in the sense that they will require you to put up collateral that can be in the form of cash, property, assets or even your business for that matter. They typically process loans in a day and will award funds to your business in less than 10 days, should your application be approved.

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2. 401k Loan

This will be your perfect option if you are a salaried employee contributing to your 401k, while also moonlighting with a business on the side.

Unlike a traditional loan or peer-to-peer loan, a 401k loan will not need a collateral at all, as your 401k savings become a collateral in itself. 401k loans are extremely affordable and come with other great benefits such as a no-prepayment penalty clause. They are also available very quickly, often in a matter of days.

The disadvantages are that taking out a 401k loan will mean that you can’t contribute to your 401k until the loan is repaid. Also, ending your employment or getting fired from your job will mean that your repayment period on the 401k loan gets knocked down to just 60 days, unless you can secure new employment.

A 401k loan is one of the most popular ways to fund a startup, as startup business owners are usually still earning a paycheck.

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3. Crowdfunding

Here’s a fantastic story about two first year college graduates who recently raised $10,000 to fund their business venture of selling cold coffee on a tricycle, to just one college! They did it and did it easily with crowdfunding. What is amazing is that they secured the funding even though they promised to repay with just a free cup of coffee, a T-shirt, a picnic, or a coffee roasting class! Read about the BrewBike crowdfunding story here!

You can do the same for your business as well. All you need is passion for your business and a good presentation! Indiegogo and Kickstarter are two of the most popular crowdfunding sites out there. Give them a shot today!

4. Business loans based on your cash flows.

If your business has a stable cash flow, there are lenders out there who can lend you as much as $500,000 as a loan, as long as they see that your cash flow can handle the repayment. Such lenders will only require you to put up a personal guarantee and not even a collateral, to secure such loans.

Not surprisingly, this is one of the most sought after alternative funding methods for businesses that already have a stable operating history. Since such loans are processed in a matter of a few days, they are also the most popular option to business owners seeking emergency business loans, like when loans have to be used to repair or replace machinery that keeps a business running on its feet.

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5. A Loan from friends and family, with a legal agreement.

Everyone has great friends and family members that they look up to. Chances are that such friends and family adore you as well. There is absolutely no harm in raising funds from these people that you know, as long as you believe in your business and have all the intentions to pay it back.

But, you must do your homework before you approach friends and family for a business loan. Read this great book about how to seek out a business loan from family and friends, after making it a legal binding. Adding a legal  aspect to it will tell your friends and family that you are sincere about this loan request and that you want to pay it back.

Making it a legally binding loan request will also remove the awkwardness that might arise when they are willing to give you a loan, but want it documented in some way. Most friends and family say no to loan requests because it is just “asked” for, often leading them to think they have no recourse if the borrower decides not to repay the loan.

If you are uncomfortable approaching friends and family for a loan, try the other 4 options mentioned in this article. But then, don’t entirely rule out this option. You never know as there might be a friend or relative who will be more than happy to help you out, often for nothing in return!

Featured photo credit: Loan Now via loannow.com

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Last Updated on November 27, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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