Advertising
Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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

More by this author

10 Best eBook Reader Apps for Android You Need to Know Mac Buggy after Mac OS Sierra Update? 4 Fixes Here! 5 Alternatives to A Traditional Business Loan Retirement Calculator Image from Money Looms1 How Pizza, Alcohol, Restaurants & Clubbing Can All Add Up to a $600,000 Retirement Top 10 Smartphones In The World

Trending in Money

1 How to Set Financial Goals and Actually Meet Them 2 25 Killer Sites For Free Online Education 3 How to Develop a Millionaire Mindset in 6 Simple Steps 4 5 Books You Must Read if You Want to Be a Millionaire in Your 20’s 5 20 Better Money Habits to Help You Increase Your Savings

Read Next

Advertising
Advertising
Advertising

Last Updated on August 20, 2019

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

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. And 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 on how to set financial goals and then actually meet them with ease.

5 Steps to Set Financial Goals

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

1. Be Clear About the Objectives

Any goal (let alone financial) 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 is for. It could be anything like kid’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, however small they may be, that you foresee in the future and put a value to it.

2. Keep Them 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 out of the line will definitely hurt your chances of achieving them.

It’s important that you keep your goals realistic in nature for 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”. And this quote sums up the best what inflation could do your financial goals.

Therefore account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future.

For example, if one of your financial goal is your son’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation.

4. Short Term vs Long Term

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

As a rule of thumb, any financial goal, which is due in next 3 years should be termed as 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.

More on this later when we talk about how to achieve financial goals.

Advertising

5. To Each to His Own

The journey of setting financial goals is an individualistic affair i.e. your goals are your own goals and are determined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only to realize later on that it was not meant for us.

It is important that your goals are actually your goals and not inspired by someone else. Take a hard look at this step at all the goals you’ve set for after this step, you will be on the way to achieve them.

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

11 Ways to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a 2 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. So let’s get down to ensuring healthy savings.

Ensuring Healthy Savings

Self realization is the best form of realisation 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 monthly expenses. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you would be surprised to see how small expenses add up to a sizeable amount.

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

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classical mistake which almost everyone of us do. We pay ourselves last!

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 then manage all the expenses from the rest.

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

Taking the automatic route will make us lose control of our money and hence will compel us to manage in what’s left with us thereby increasing the savings rate.

3. Make a Plan and Vow to Stick with It

Budgeting is the best to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be made.

Advertising

Nowadays, several money management apps and wallets can help you do this automatically. It’s easy and who knows, you may just end up doing what people fail to do.

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. Rise Again Even If You Fall

Let’s be realistic. It’s not like the world will come to an end if you made one mistake. This isn’t called leniency but discipline.

If you fail to meet your budget for a month, don’t give up the entire effort just like that. Instead, start again.

Remember that flexible plans are the most realistic plans. So go forward and try to follow your financial goals as planned but if for some reason, the plan gets out of hand for you, do not give up on it just yet. This has a lot to do with your psychology rather than any material commitment.

All you have to do is to stay on the road and vow to stay on it, no matter how much you fall down.

5. 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 counter intuitive to many but there are some deft ways of doing it. For example:

Always eat out (if at all) during weekdays rather than weekends. Usually weekends are expensive. Make it a habit and you would in turn be saving a great deal.

If you are travelling buff, try to travel during off season. Your outlay will be much less.

If you go out for shopping, always look out for coupons and see where can you get the best deal.

So 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.

Advertising

6. 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. And it would be rather easy to lose the grip over your discipline.

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

7. Maintain a Journal

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

So 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.

Use this journal to write down all essential points such as your short term, mid term and long term goals, your current sources of income, your regular expenses which you are aware of and any committed expenses which are of recurring nature.

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

At this point, you should be ready with your financial goals and would be doing brilliantly with savings; now it’s time to talk about the big daddy – Investments.

Making Smart Investments

Savings by themselves don’t take anyone too far. However savings when invested wisely can do wonders and we are at that stage where we will talk about making smart investments.

8. Consult a Financial Advisor

Investments doesn’t come naturally to most of us therefore rather than dabbling with it ourselves, it is 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.

9. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about them.

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.

Do you remember we talked about bifurcating financial goals in short term and long term?

It is here where that classification will help.

Advertising

So 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 as compared to equity instruments.

10. 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.

So make friends with this wonder kid. And sooner you become friends with it, quicker you will reach closer to your financial goals.

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

11. 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; taking stock of how our investments are doing.

If there is one single step where everything (so far) can go wrong, it is at this step – Measuring the Progress.

If we don’t measure the progress timely, then we would be shooting in the dark. We wouldn’t know if our saving rate is appropriate or not; whether financial advisor is doing a decent job; whether we are moving closer to our target or not.

Do 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

This completes the list of tips for you to set financial goals and actually achieve them with not so great difficulty.

As you can see, all it requires is discipline. But guess that’s the most difficult part!

More About Personal Finance Management

Featured photo credit: rawpixel via unsplash.com

Read Next