problem, since a joint survey by the Federal Reserve Banks of New York, Atlanta, Cleveland, and Philadelphia found that more than 50 percent of all small-business loans sought are below this $100,000 threshold.
Due to the diversity of small businesses, there is no “one-size-fits-all” lending solution for entrepreneurs. This post walks you through three great financing options.
1. Community Banks
Community banks represent about 50 percent of all outstanding small business loans, and are a major source of microloans, according to Lael Brainard, a member of the Board of Governors of the Federal Reserve System. As their name suggests, these banks are typically focused around local communities–as opposed to large regional or national banks (Key, JPMorgan Chase, etc.).The chief advantage to using community banks is that most conduct relationship-based lending. This means that bankers will take the time to assess the quality of your loan application based on a number of different factors; they will go over your company’s finances to establish creditworthiness. By contrast, many major banks will rely on credit scores to process microloans. For startups and new companies that haven’t had time to establish a long credit history, this has the potential to disqualify them from the outset.
Best for: Non-revolving loans; companies with a short or non-existing credit history.
2. Small Business Credit Cards
One of the best ways to help finance purchases is to use small business credit cards. Outside of the obvious advantage of providing you with revolving credit month-to-month, credit cards can also help you build your credit score and earn rebates.Quality of past loans makes up a major portion of how your business’s score is determined. Unless you are frequently engaged in lending with various vendors, odds are your firm has a thin credit profile. For this reason, using a business credit card to pay for your expenses is prudent–over time; this practice will build your company’s credit score. Whenever possible, credit-card balances should be paid off in full with each billing cycle. Also, be sure to avoid missing payments or becoming delinquent. Such things can set your score back tremendously and will take a long time to undo.
Another reason why using small-business credit cards is worthwhile is the potential rebates they earn. The best business credit cards reward users for every dollar charged to them. This has the potential to earn your account anywhere between 1 percent and 5 percent of your purchases. Before applying, just make sure to consider the vendors your company buys from the most, and then sign up for a card that provides the highest rewards in those categories.
Best for: Establishing credit score; reducing costs.
3. Online Lending
Online platforms account for just a small percentage of the small business lending market, though they are also the youngest. Online lending companies, such as OnDeck, Lending Club, and Prosper, use non-traditional data sources in their underwriting process. As with community banks, online lending provides an advantage over credit score-based approaches of larger banks, which ostracizes many young companies.The downside of online lending is that regulatory practices have not yet been clearly established, and enforcement of standards is difficult. As a result, if your company is seeking a small business loan from an online company, it is recommended that you approach with extra caution. You should always make sure you understand and fully read through the terms of any loan. Set up a vetting process and avoid companies that are not a well established in this space.
Best for: Obtaining microloans based on non-traditional data sources.
A Financing Alternative: Crowdfunding
One alternative to obtaining a small business loan is crowdfunding. This approach is meant for businesses that are in the process of developing a new product or service. Crowdfunding relies on the general public to donate money towards the creation of your product–usually with the promise of some sort of reward, once completed.Crowdfunding has surged in popularity in recent years. One of the bigger crowdfunding companies, Kickstarter, has raised over $2 billion, across 99,000 projects–an average of about $22,000 per campaign. Typically, your company would need to have a good social media presence or campaign in order to generate enough interest to meet a large funding goal. Crowdfunding initiatives also tend to be product and tech-based. Therefore, a traditional company, such as a plumbing or IT firm, would not find any success through this approach.
Best for: Young companies developing a product; should have the capabilities to run a successful online marketing campaign.
Source:allbusiness.com
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