Three alternatives to a small business loan

Banks and credit unions tend to offer the most affordable business financing – if your business can qualify. Only a small proportion of small business loan applications have been approved and this discrepancy is exacerbated.

According to the Federal Reserve Credit Survey for 2022, approval levels from both small and large banks decreased from 2019 to 2021. Among small business owners who received at least part of the requested funding, small banks approved 8% fewer applicants in 2021 than in 2019, and large banks approved 15% fewer applicants over the same period.

However, many business owners still need capital to cover day-to-day costs – especially as they continue to face economic challenges such as supply chain disruptions and rising inflation.

If you can’t get a traditional bank loan, you can look for some alternative ways to finance your business. Here are three options to consider.

See also: 7 lessons for money from experienced entrepreneurs for better ways your small business can spend and save

1. Online lenders

Online lenders can offer different types of small business loans and generally have more flexible requirements than bank lenders – although the cost of the loan is usually higher.

And while banks and community financial institutions may feel the pressure of economic change – such as rising Federal Reserve interest rates – alternative lenders are usually filling the market, says Josh Palky, chief credit officer of Founders First Capital Partners, San. Diego-based small business lender that offers revenue-based financing and business consulting services.

Alternative lenders are less likely to experience the same pressures as bank lenders or to shift their internal processes and ways of valuing business loan transactions, Palki said. These creditors may be less risk averse as they usually charge higher interest rates than conventional creditors.

Many online business lenders offer streamlined application processes, and some can provide financing in as little as 24 hours. To find the right lender for your needs, you need to consider factors such as the types of loans offered, eligibility criteria, speed of financing and customer service, as well as interest rates and fees.

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2. Business subsidies

For free funding that you don’t have to pay back, a small business grant can be a good option. Business grants are offered by federal, state, and local governments, as well as private corporations.

You can view thousands of federal small business grants on Grants.gov, which is run by the Department of Health and Human Services. However, these grants often have very specific eligibility criteria, so you will want to review your qualifications before applying.

There are also local economic development agencies and corporations that are responsible for promoting business creation and job creation, said Hal Shelton, a small business mentor serving SCORE’s head in Washington, D.C., a nonprofit organization that offers free resources to small business owners.

Many of these local organizations offer business grants and even cheap loans. For example, the New York-based Empire State Development Agency offers a number of small business financing options, including the Global NY Grant Fund, which provides grants of up to $ 25,000 to New York-based businesses looking to start or increase their global exports.

Although small business grants are ideal if you can provide them, applying can be competitive and time consuming. If you need faster funding, you will want to consider other options.

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3. Increase equity

If you have a loyal customer base and a desire to market your business, you may want to increase your equity. With a stock crowdfunding platform, you can raise capital online – investors give you capital in exchange for a stake in your business.

After Charles Alexander and his co-founders were unable to obtain a bank loan for their business, The Black Bread Company, they decided that group equity financing was a good option for their community roots.

The goal was to be able to offer the lowest buy-in for stocks, says Alexander. They wanted people to be able to invest in a company they know – let them be part of the growth and do it at a rate that almost anyone can be part of the journey, he said.

However, group equity financing is not a quick and easy financing solution.

“It’s a long process when you give up your company’s stock to the public,” says Alexander. He notes that business owners will need to make sure they meet the guidelines and regulations of the US Securities and Exchange Commission.

Many equity platforms – such as Fundable, StartEngine and Netcapital – offer a variety of support services to help business owners through the fundraising process. StartEngine, for example, provides small business owners with a dedicated fundraising strategist who works with them throughout their campaign and helps with both marketing and advertising strategies.

Preparing for a group equity campaign can be frustrating, says Alexander. “But once we started, it was great. We literally raised about $ 660,000 in 30 days.

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To succeed with equity crowdfunding, you need to take the time and effort to promote your business; and of course, you should be prepared to give up some of the property in your company.

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Randa Chris writes for NerdWallet. Email: [email protected]

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