Three alternatives to small business loans

Banks and credit unions tend to offer the cheapest business financing if your business qualifies. Only a small fraction of small business loan applications are approved and this disparity is getting worse.

According to the Federal Reserve’s Small Business Credit Survey 2022, approval rates for small and large banks declined from 2019 to 2021. Among small business owners who received at least some of the funding they sought, small banks approved the 8% fewer applicants in 2021 than in 2019 and large banks approved 15% fewer applicants in the same time frame.

However, many entrepreneurs still need capital to cover day-to-day expenses, 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 may be looking for some alternative ways to finance your business. Here are three options to consider.

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1. Online lenders

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

And while community banks and financial development institutions may feel the pressure of economic changes, such as the Federal Reserve raising interest rates, alternative lenders typically fill space in the market, says Josh Palkki, chief credit. officer of Founders First Capital Partners, a San Diego-based small business lender offering revenue-based business consulting and financing services.

Alternative lenders are less likely to experience the same pressure as bank lenders or change their internal processes and ways of evaluating corporate loan agreements, Palkki says. These lenders may be less risk averse because they typically charge higher interest rates than conventional lenders.

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

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2. Contributions to businesses

For free loans that you don’t have to repay, small business grants can be a good option. Business grants are available from federal, state and local governments, as well as from private companies.

You can browse thousands of federal small business grants on Grants.gov, which is managed by the Department of Health and Human Services. However, these grants often have very specific eligibility criteria, so we recommend that you review your qualifications before applying.

There are also local economic development agencies and companies that are responsible for promoting company formation and job creation, says Hal Shelton, a small business mentor serving the SCORE branch of Washington, DC, an organization not profit offering free resources to small business owners.

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

While small business grants are ideal if you can secure them, application can be competitive and time-consuming. If you need faster financing, we recommend that you consider other options.

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3. Increase equity

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

After Charles Alexander and his co-founders failed to secure a bank loan for their business, The Black Bread Company, they decided equity crowdfunding was a good option tied to their community roots.

The goal was to offer the lowest buy-in for the shares, says Alexander. They wanted people to be able to invest in a company they’re familiar with – have them participate in the growth and do so at a pace where almost anyone could be a part of the journey, he says.

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

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

Many equity crowdfunding platforms, such as Fundable, StartEngine and Netcapital, offer a variety of support services to help entrepreneurs with 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 marketing and advertising strategies.

Setting up an equity crowdfunding campaign can be frustrating, says Alexander. “But once it launched, it was great. We literally raised about $ 660,000 in 30 days. “

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To be successful with equity crowdfunding, you need to put the time and effort into promoting your business; and, of course, you must be willing to give up some property in your business.

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

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