A startup business does not always have to approach a commercial bank for a loan and get summarily rejected due to its unstable status and uncertain future. Fortunately, there are several other alternate and unusual sources through which a startup can easily raise the fund and capital required, albeit with a price.
Some of these sources are:
- Peer-to-peer lending
- SBA microloans
- Customer lenders
- Private lenders and
- Home-equity loans
Some of these alternative sources of lending have only started to function only a few years back. However, to make the best use of these platforms you will need to stick to the bottom line.
Commercial banks have traditionally been the go-to source for a long time for the
businesses that needs cash to run their business. However, these banks are not the suitable option for every business, especially when the businesses need money quickly but do not meet the eligibility or the underwriting standards of the banks. This is when these alternative sources such as Libertylending.com and others come into play.
The catch here is that some of the alternative sources offer loans at much more favorable terms as compared to the others. It is therefore required that you know about these terms and conditions along with the pros and cons of each before you choose one of these unconventional lenders. It will help you to know how each of these lenders operate so that you can make a more informed decision.
When it comes to financing a startup business, P2P or Peer to peer lending is one of the new kids on the block. There are several different sites you will find on the internet. These platforms typically act as intermediary between the investors who provide the funds and borrowers.
- One of the most significant advantage of P2P lenders is that you will get quick access to capital. There are a few sites that may even promise loan decisions in as less as 24 hours. Therefore, P2P lenders is an extremely useful option if you want some extra cash in quick time.
- On the other hand, the downside of P2P lenders is that most of them will want the borrowers to have a credit score in excess of 600. Therefore, you must make sure that you have a strong credit or look for other options if there are some major imperfections in your credit history.
Your credit score plays a big role in getting a loan in favorable terms both for traditional lenders as well as P2P lenders. If your credit score is favorable then you can avail a loan at an interest rate as low as 4.99% a year. On the contrary, if it is low and poor, the same rate can go as high as 40% and even have a loan origination fee attached with it as well.
This is another useful way to get cash for your startup in a quick time. This involves selling off your accounts receivable to the financial institution called factoring in lending terms. Often, companies often use these factors to manage their cash flow as well as to deal with their slow-paying customers.
- The factor typically advances a part of the Accounts Receivable which ranges between 75% and 80% of an invoice normally
- They hold the remaining 20 to 25% as a reserve. That means, if you have receivable accounts of high quality and value, you will be able to borrow more, provided there is a good prospect of these accounts to get paid.
However, there too is a glaring downside in factoring which is the high cost involved in it. Having said that, it is an appealing option as well especially if you work in an industry where normally there is a comparatively long lag time in collecting the receivables.
The US Small Business Administration, SBA offers a large number of loan programs that are typically designed to help startup entrepreneurs unveil and grow their businesses. Microloan programs of SBA are one of the easiest to access.
- This offers loans up to $50,000
- It offers these loans to small businesses as well as competent childcare centers.
- These microloans are made available through the nonprofit motive community-based organizations.
- These loans can be used to increase the working capital, buy inventory, supplies, as well as machinery.
More often, these lenders will also provide you with more than just funds for your business. They will also offer consultancy services that are also specifically designed to help a startup business to succeed. In fact, before the loan application is even considered, most of the borrowers need to undergo a specific training.
According to the SBA, the rates of interest rates for these loans typically ranges from 8% to 13%. If you do not know where to find them, contact the SBA district office in your area.
With the arrival of crowdfunding in the recent years, small business owners and startup entrepreneurs now no longer have to turn to family and friends when they need funds and other lending sources are out of reach.
- All you have to do is provide info about your funding requirements and
- Solicit people whom you know to make pledges.
Making the best use of your personal connections have never been so easy but make sure that your network is bigger enough to increase your chances and you are more creative in your advertising.
After the financial crisis that hit the economy in the last decade, the banks became more cautious in lending giving rise to these private money lenders. They are now the major competitors to commercial banks.
With a double-digit annual growth, this industry has proved to be a boon for the startups and small businesses providing them ready cash in favorable terms. However, the borrowing costs may be higher than the traditional sources and there may also be prepayment penalties commonly imposed when you repay your loan early.
In the end, you can also try out customer lenders if you are into agriculture or a more secured home equity loan to deal with your financial shortfall.