Non-SBA Financing Options for Small Businesses
SBA loans aren’t granted to just anyone. If you don’t have outstanding credit, the required amount of time in business, or the endurance to go through the lengthy application process, you might want to explore other ways to secure funds that can help your business succeed.
It’s normal for entrepreneurs (like you!) who own, or are planning to own, a small business frequently find themselves in need of additional funds to run their businesses. While SBA 7(a) loans are a favored small business financing option, they’re absolutely not the only route you can take.
Instead of the SBA, you could hit up a bank. Instead of a bank, you could use an alternative lender. You could obtain a business credit card or try crowdfunding. There’s also equity financing, meaning a percentage of your company and profits (equity) will be exchanged for cash from an investor. Here are 17 alternatives to SBA financing for your small business.
Alternative #1: Traditional Financing
Traditional small business financing tends to be associated with taking on debt. Each type of debt financing comes with terms, fees, and requirements. You’ll generally apply and be evaluated in terms of your business history and creditworthiness to eliminate lender risk.
Alternative #2: Banks and Credit Unions
Banks and credit unions are a perfect starting point for looking into small business funding. These traditional lenders are literally everywhere, and most business owners are already familiar with the bank (or credit union). With banks and credit unions, you’re likely to get the best annual percentage rate (APR) on your loan. Even though you’ll be paying interest, these loans will require good credit scores, and you’ll usually need to have some business history established, but the relationship that develops between you and your local bank can also be a great foundation for future financing needs.
Helpful Resource: How Do I Get an SBA 7(a) Loan with Bad Credit?
Alternative #3: Business Credit Cards
With a business credit card, you can access a revolving line of credit for business expenses. It’s often much easier to qualify for a business credit card than for a loan, and gives you access to quick cash. Using a credit card associated with your business also means you’ll be building good history with your business credit, increasing your chances of being eligible for more funding from lenders in the future. It’s a good idea to look for business credit cards with points or rewards systems, and to prioritize aggressive repayment to keep your personal and business credit a boost.
Alternative #4: Business Lines of Credit
If you already have proven business success and solid business financials (and can send continued proof of your business’ health on a regular basis), you can get funding in just a couple of days with a business line of credit. Instead of predicting your funding needs in order to qualify for a large lump sum, a small business line of credit allows you to use your credit limit as needed. It also generally offers lower interest rates and better repayment terms than credit cards -– you only pay interest on the funds you take out. Collateral may or may not be requested and required.
Learn More: 5 Quick Fixes to Improve Your Business Credit
Alternative #5: Short Term Business Loans
If your credit isn’t great, and don’t mind making fixed monthly (or even daily) payments, short term business loans may be a possibility. The principal and interest will generally need to be repaid quickly -- in two years or less, so you’ll want to be confident that your business can handle that kind of pressure before applying. Short term business loans also may limit your funding amount, and often demand higher APRs than other loans.
Alternative #6: Term Loans
If you have a business that already meets a lender’s borrowing requirements, and have time for a longer application process, term loans allow longer repayment terms with minimal restrictions on fund use. With higher loan amounts and lower interest rates and fees, your lender will want to make sure you’re good for the money.
Alternative #7: Equipment Financing
With equipment financing, the flexibility comes from using the actual equipment as collateral, so loan approval won’t be based on your other assets. You’ll need to consider equipment deprecation for tax purposes, though. The paperwork for business equipment financing is minimal and approval can be quick, but a down payment can definitely help, and is sometimes even required.
Alternative #8: Merchant Cash Advances
If your credit is an issue, merchant cash advances can work to cover shortages on operating costs. You’ll either be able to repay through a percentage of credit card sales or agree to make fixed daily or weekly payments. Compare APRs carefully when choosing a lender.
Alternative #9: Accounts Receivable Financing
If you have outstanding invoices and need the funds ASAP, accounts receivable financing (invoice factoring) will quickly grant you most of the outstanding invoice amount. The creditworthiness of your clients (the invoice financing company will check) is key to whether or not you’re approved. You’ll pay around 3% of the invoice amount each week the invoice goes unpaid; be conscious of high cancellation fees before signing a contract.
Alternative #10: Personal Loans
A personal loan is a sum of money that you borrow and then pay back in fixed monthly payments, usually over two to five years. Most personal loans don’t require collateral, and as long as your lender doesn’t have restrictions on using a personal loan for business purposes, you can use the funds to kick-start your next business project! Personal loans are a good option if your business history isn’t (yet) super solid, too.
Alternative #11: Online Lenders
If you don’t qualify for a bank loan, you might consider online lenders such as OnDeck, Credibility Capital, Kabbage, QuarterSpot, or LendingClub. Online term loans usually have higher interest rates, but they also general feature a simpler application process and approval within a week. Not to mention they often don’t require collateral.
Alternative #12: Alternative Non-SBA Business Financing Options
While most traditional small business funding opportunities require taking on debt, ways to get funding without that catch do exist. To get around accruing debt, it’s often necessary to offer business equity (investors get a percentage of your profits, plus proceeds if you sell your company) in exchange for the upfront cash, especially if your business isn’t yet fully established.
Alternative #13: Venture Capital
If your small business has the potential to grow, but lacks the resources, a venture capitalist might be a good friend to make. Look for a venture capitalist or company that has specific expertise in your field. You’ll usually need to prove a significant potential for business growth; either angel investors or venture capitalists will want to see proof that they’re likely to get their initial investment back within a few years. Having a defined exit strategy will make you more appealing, since that’s a fast way to provide a large return on the investment.
Alternative #14: Small Business Crowdfunding
With crowdfunding (which continues to grow), you can offer various levels of services or products or bonuses in exchange for cash donations towards your small business goals. Rewards-based crowdfunding (Kickstarter, Indiegogo) gives donors a product or service related to your business, with the value they receive depending on the amount donated. You won’t have to appease shareholders nor stress about loan repayments. Equity-based crowdfunding (Republic, CircleUp, Crowdfunder) gives donors a certain number of shares in your business, depending on the amount they contribute. Fundable allows small businesses to choose between equity-based and rewards-based funding.
Alternative #15: Small Business Grants
Small business grants give you a lump sum, with no repayment required as long as you report on your progress (and hopefully success)! The SBA offers small business grants such as the Small Business Innovation Research Program (SBIR) and Small Business Technology Transfer Program (STTR). You can also research your specific field for private foundations offering small business grants.
Alternative #16: Small Business Partners
Look for interested individuals who might be interested in a partnership. With a partner, you’ll have the experience and wisdom of additional experienced professional(s). You’ll also make your business much more appealing as a loan candidate to banks or other lenders.
Alternative #17: Family and Friends
Don’t forget that the people closest to you might be your greatest champions -– and they might even get satisfaction from contributing to your business dreams. Just be sure to respect them as you would any investor –- give them your business plan and financial documentation so that they can accurately analyze their risk. It’s also especially important with family and friends to preserve your relationship by guaranteeing how repayment will occur.
Good luck! For a one-on-one consultation with our friendly staff, contact SBA7a.loans with your questions now. It's free, confidential, and dare we say fun, too.