The first few years are often the most uncertain for small business income. Without established credit, many businesses find it hard to get working capital. This can make it hard to invest in inventory and facilities, or staff up to establish a solid presence and revenue stream. Even as the owner of a well-established business, you can still have a hard time finding a traditional lender who will essentially take a chance on your company. Many small business owners are turning to alternative financing options such as peer-to-peer lending and online pawn shops.
What about other sources of working capital? Here are four small business financing options you’ve probably never heard of.
1. Short Term Loans or Invoice Financing Through Alternative and Online Lenders
Online lending is a viable financing option for small businesses without a sparkling or deep credit history, though sometimes at higher interest rates than traditional bank loans. Cash flow loans are usually unsecured smaller amounts up to $50,000 which are available within 1-2 days, and repaid daily or weekly over shorter terms (anywhere from a few weeks to 2 years).
The online lending application process eliminates a lot of the back and forth and paperwork associated with banks and traditional lenders. Borrowers can save even more time with simple and easy online applications like the one at QuickBooks Capital, which pulls accounting data directly from the business’s company file to find loans that are tailored to their needs automatically.
There are well-known online lenders who provide short term loans and invoice financing in partnership with QuickBooks Capital, or individually:
- Swift Capital
- Direct Capital
2: Term Loans Through Alternative and Online Lenders
Term loans are anywhere from 2 to 5 years in length, and for larger amounts ($25,000 to $500,000) which are repaid monthly according to the loan agreement. These are almost always secured loans, so the rates are typically lower than the rates on cash flow loans. These loans are easier to apply for than traditional bank loans, and they tend to get funded faster, too—often taking 1-2 weeks to make funds available.
These marketplace lenders provide alternative financing with the benefits of traditional banks:
- Funding Circle
- Lending Club
Alternative loans can have higher interest rates than traditional loans. If you’re a small business in the market for a loan, do your homework, and always go with a reputable, established company. See what’s out there.
3: 401k Loans and Rolling Over Tax Deferred Savings
Guidant Financial’s iFinance provides a means for small business owners to use tax-deferred retirement savings for startup investments while eliminating some of the penalties that accompany early withdrawals. This “rollover as business startup” funding can be used for specific activities such as buying a franchise, building a storefront, or purchasing equipment.
It takes about a month to set this up. Guidant establishes a corporation for the small business and a 401(k) account. Then Guidant rolls the business owner’s existing retirement assets into the account, essentially making the 401(k) a shareholder of the business.
When using savings to invest in a business, borrowers won’t pay any interest. However, there is the risk of losing retirement savings if the business doesn’t perform as expected. If you’re considering this financing option, keep the convenience of access to your retirement savings and the risk of loss in mind.
If you know you’re capable of great entrepreneurial achievements, but need investors to fund your big idea, a crowdfunding platform like Upstart (founded by ex-Googlers) could be the answer. Though you can ask for funding based on a specific business idea, Upstart is founded on the idea of investing in a person’s potential. Investors each contribute small amounts of startup capital to help turn your ideas into reality.
In return for funding, you share a small portion of your income for 10 years. For example, Trina Spear, a Tufts University and Harvard Business School grad, secured $20,000 and mentorship through Upstart to co-found a medical apparel company, FIGS Scrubs. In exchange, she’ll repay the loan with 1 percent of her pre-tax income over the next decade. She intends to use the money to pay her student loans, while raising the $1 million venture capital money needed to fund her startup.
Now that you know about these four financing options, your next search for business capital may find funding that better fits your business’s needs.
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