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.
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.
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.
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.
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