4 Business Loan Alternatives for Your Company

| July 15, 2014 | 0 Comments

55.-Small-Business-Loan-Interest-RateBusiness loans are typical solutions to different problems. A business line of credit can be used to expand production, meet payroll or gain discounts for bulk purchases. Term loans allow you to buy equipment, company vehicles or refinance existing debt.

However, many entrepreneurs do not qualify for financing. There are several reasons for this, which include:

l  Industry (Bars, Restaurants, Contractors)

l  Lack of  Income

l  # of Years in Business

l  Poor Credit

l  Lack of Quality Collateral

Have you been turned down for a business loan? It is important to understand why your application was denied and look for suitable alternatives. The loan’s purpose, amount and repayment must all be considered. Knowing the answers to these questions will increase your loan ROI and reduce financing costs.

Here are small business loan alternatives for various needs:

Industry Loans:

Banks evaluate loan requests based on historical data for your industry. For different reasons, various industries face common denial of credit. Loan officers are wary of niches with high failure rates, such as bars, restaurants and construction contractors.

As an alternative, lenders that cater to niche businesses have emerged. Restaurant financing or construction loans are examples of this trend. A niche lender may still check your credit and ask for collateral, but understands the dynamics that affect particular industries. For instance, a restaurant may need money to buy food and supplies for catering events. A line of credit would be more suitable for this situation, but installment loans for longer term needs are also available.

Tip: Check if the lender reports to credit agencies. This allows your business to build a credit history for future financing needs. Make sure to understand application fees and early repayment terms.

Crowdfunding:

Venture capital is no longer reserved for million dollar deals. Crowdfunding brings private equity to the masses through various platforms. Your product and loan request may affect investor decisions, but not prevent you from joining a site. There are 2 primary types of crowdfunding available:

Donation: Investors provide financial capital in exchange for shares of ownership or recognition. ‘‘Thank you notes’ or ‘certificates of appreciation’ are examples.

Private: Investors expect a financial return in the form of interest payments or ownership stakes.

Be sure to understand the terms for each crowdfunding site. For instance, certain sites are ‘all or nothing’, meaning you must hit the campaign goal to receive funding. Fundable and Kicksater are examples. Conversely, Razoo and Crowdrise are flexible funding sites that allow you to keep all money raised.

Generally speaking, flexible funding is more suited for smaller capital needs, such as buying a piece of equipment or raising money to buy supplies.

Tip: Larger deals tend to be more successful on ‘all or nothing’ platforms. Why? Investors feel more confident knowing their money will be used only if the needed level is reached. This increases the odds of a loan being successful.

Merchant Loans:

Does your business accept credit cards? If so, merchant financing provides short term cash in exchange for a % of daily credit card sales.

Merchant loans are an alternative to credit cards or lines of credit for short term financing. The volume and history of credit card receipts are reviewed by the lender to determine the premium/payback. A more stable flow of credit card sales will likely have a lower percentage. Your daily credit card sales will be tapped until the loan amount and premium are paid back.

Tip: Aside from meeting expenses, companies can use merchant loans as leverage. A restaurant can bid on private parties or catering knowing that the funds to buy food and decorations is available.

In these cases, you should calculate the ROI of a merchant loan in advance. For example, will the profit margin on hosting a private party exceed the premium you will pay for a merchant loan? Business owners can make informed decisions by evaluating their borrowing decisions in this manner.

Factoring:

Not all revenues are created equal. Accounts receivable affects your cash flow and may create a need for short term capital. Factoring is a supplement or alternative to credit cards or lines of credit for these situations.

A/R factoring buys your invoices at a discount to the face amount for immediate cash. Lenders will consider how much and from whom the receivable is from. A/R from a brand name company will typically have less risk and fetch a higher % than a promise to pay from an individual.

Tip: Business owners should focus on selling their high margin receivables. Selling A/R with a 20% profit margin for 90 cents on the dollar still allows you to make a profit on the transaction.

Summary:

There are more choices for alternative financing than ever before. Businesses can stay afloat or expand in ways not otherwise possible with these options

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