Lending is a massive, massive industry. You may apply for virtually any sort of finance, including vehicle loans, house loans, personal loans, and the list goes on from there. Loans are the quickest and most convenient method to obtain funds, but what if you own a small business and want a loan?
A small business loan may be an excellent source of capital for the expansion of your company. It is possible, however, that the procedure of obtaining a small company loan will be complex and lengthy. There are several lenders available, and you must exercise caution in selecting the most appropriate one.
This blog is intended to assist companies in understanding the lending process, learning about the many types of lenders, and figuring out how to take the first step toward obtaining a business loan, among other things.
What is it about small businesses that make it difficult to obtain bank loans?
For various reasons, small firms find it difficult to obtain capital to grow. However, banking institutions have an old-fashioned, labor-intensive lending procedure and rules that are hostile to small firms. This is not because banks do not want to lend to small businesses; on the contrary, they desire to do so.
It is even more difficult to obtain capital since many small firms requesting loans are new. Banks normally want at least a five-year history of a healthy business (for example, five years of tax information) before making a loan offer to a new business.
Alternatives to traditional bank funding
If your small business needs more cash but does not qualify for a standard bank loan, various alternative financing techniques and lenders may be able to accommodate your demands. Some of the most popular financing solutions for startups and small enterprises may be found.
1. Partner financing
With strategic partner finance, another entity in your sector pays the expansion for exclusive access to your product, employees, distribution rights, ultimate sales, or a combination of those elements, all of which are valuable to the company. According to Serkes, this option is frequently missed.
“Strategic finance functions similarly to venture capital. It is typically a stock sale rather than a loan – though it can occasionally be royalty-based, the partner receives a percentage of every product sale,” she continued.
Collaborate finance is a viable option since the firm you partner with is almost always a huge corporation. It may even be in a comparable sector or industry interested in the business.
2. Invoice financing or factoring
Invoice finance, also known as factoring, is a service in which a service provider advances your money against your outstanding receivable accounts, which you then repay once your customers have paid their bills. As a result, your company will have the cash flow required to continue operating while you await payment from clients who have not yet paid their invoices.
According to Eyal Shinar, CEO of small company cash flow management startup Fundbox, those advances allow businesses to overcome the pay gap between invoiced work and pay to contractors and suppliers.
According to Shinar, the closure of the wage gap allows businesses to accept new projects more rapidly. “Our purpose is to assist company owners in expanding their operations and hiring more employees by providing a consistent cash flow.”
3. Microloans
Microloans are tiny loans made to entrepreneurs with little or no collateral to put up as security for the loan. Microloans may come with limits on how you may spend the money. Still, they are often used to pay operating expenditures and cash reserves for equipment, furnishings, and supplies, among other things.
One example of a local business microlender is Kabbage, which provides microloans ranging from $2,000 to $250,000 to small businesses. You can read more about Kabbage in our evaluation of the company. Another example is Small Business Administration microloans that nonprofit groups provide.
4. Merchant cash advances
In terms of cost and structure, a cash loan is the polar opposite of a small company loan for the same reason. Cash advances are a quick and convenient way to access funds, but they should only be used as a last resort due to the high cost of these loans.
Many of the leading merchant services providers give this option, so check with your supplier to see whether this is a source of financing that you might consider exploring.
According to Priyanka Prakash, a lending and credit specialist at Fundera, a merchant cash advance is “when a financial institution offers a lump-sum amount of funding and then purchases the rights to a percentage of your credit card and debit card sales.” “
The merchant processes a credit or debit card transaction; the supplier gets a tiny percentage of the transaction until the advance is repaid.”
Cash advances, according to Prakash, may be extremely expensive and disruptive to your company’s cash flow, even though they appear to be handy. If you cannot qualify for a small business loan or any other choices listed above should you explore this option.
5. Grants
Grants from the government may be available to businesses involved in science or research. A Small Business Administration (SBA) grant is available through the Small Business Innovation Research program and the Small Business Technology Transfer program.
The recipients of these awards must achieve government research and development objectives while also demonstrating a high likelihood of commercialization.
6. Crowdfunding
Small enterprises may receive a cash boost by using crowdsourcing sites like Kickstarter and Indiegogo. Instead of seeking a single funding source, these platforms enable firms to combine modest investments from several individuals.
Bottom Line
Small business loans are available from a wide range of lenders, with various options suited to your particular company’s financial circumstances. It is possible to boost your chances of acquiring a profitable small company loan by predicting what lenders will look for and what they will need. We hope you liked our post about how to get small business loan.