According to a recent Harvard Business School “Working Knowledge” blog article, as of May 2014, it was found that only 13 percent of small business loan applicants were approved at big banks. In addition, the SCORE organization shared that small business owners are less likely to secure a bank loan if their business is a startup (less than two years in business), if they need a relatively small loan amount (less than $250,000) and if their credit score is below 640.
A recent survey published in a Wall Street Journal article detailed the extent of small business owner’s problems. 19 percent of small business owners had to postpone their investment plans due to lack of loan funding. In addition, only 18 percent were able to secure a bank loan, 17 percent resorted to borrowing money via credit cards and 13 percent turned to their family and friends for loans. With big banks failing to offer their services, these small business owners are getting more creative in finding alternative loan options.
One of the newest and biggest trends is platform lending. This form of alternative lending allows borrowers to secure the capital they need without relying on the traditional bank system. To support this, a Harvard Business School found that in 2014, while the total volume of small business bank loans decreased by 3.1 percent, overall online lending to small businesses grew by 175 percent – a sign that platform lending is indeed on the rise.
Consider the following alternative loan options if you are one of the many small business owners in need of funding:
Platform Lending
As stated previously, online services – “platform lending” services – have come onto the market as a result of businesses being unable to secure the funding they need through traditional means.
Advantages
For individuals with less-than-perfect credit, platform lending is a good option. In addition, the amount of the loans offered by platform lending services typically fit what small business owners need – an amount anywhere between $40,000 to $100,000. This type of lending is also more flexible and relevant to small business owners than the process with a traditional bank. Consider the simple, fast and hassle free application process for a merchant cash advance from a high risk provider – like FAM – offers.
Drawbacks
Be sure that you are diligent with your research. Platform lending tends to involve higher interest rates than a typical small business loan. Like you would with a credit card or other financial product, you need to do your research and make sure you understand the fine print before you sign.
Crowdfunding
An online crowdfunding campaign allows you to ask social media followers, friends and fans to contribute to your business’ growth.
Advantages
Online crowdfunding has been made easy through platforms like Kickstarter, GoFundMe and others. According to Forbes, the top six crowdfunding websites are Kickstarter, Indiegogo, RocketHub, FundRazr, GoGetFunding and StarSomeGood. You can raise money to support your business, whether it be for new product development or another specific purpose. To motivate people to fund your campaign, you can use participation strategies like giving away prizes or a special behind-the-scenes experience.
Drawbacks
While crowdfunding is flexible, that same flexibility can make it unpredictable. According to a Kabbage article, the typical crowdfunding campaign can take as long as nine weeks and raise an average of $7,000. The amount of time you have and the amount of money you need will determine whether or not crowdfunding is the best fit for your goals.
Loans from Family or Friends
For many small business owners, friends and family are the first resort. After all, family and friends not only know us best, but they are also our biggest supporters. They want us to succeed and are often eager to support our business endeavors.
Advantages
Your family will also be more willing to offer favorable payment terms than a bank would. For example, a lower interest rate, a longer time to pay off the loan, etc. If your friends or family are interested in an investment opportunity, asking for a small business loan from them is a great way to get the cash you need for your business.
Drawbacks
Asking friends and family to help may not provide all of the funds you need. They might not have enough money to spare. In addition, borrowing from friends and family can be risky – financially and emotionally. What if your business doesn’t work out? You wouldn’t want your business to become the source of hurt feelings and damaged relationships. Sometimes it is better for business and family to remain separate.