Can't Get a Business Loan? Here Are 4 Alternatives

One of the biggest challenges facing startups is getting a business bank loan, especially if you have a low credit score or little credit history. Unless you have a cosigner or some kind of collateral, your loan application will likely be turned down. New businesses are also unlikely to qualify for Small Business Administration-backed Paycheck Protection Program loans, which could be forgiven in full, due to requirements of operating with full-time staff on payroll before the COVID-19 pandemic. The good news is, other financing avenues are available. If you’ve had a bank loan application rejected or read the PPP loan requirements with dismay, it’s time to pursue other business financing options.

4 Business Bank Loans Alternatives

If you’ve applied for a loan from a bank for business purposes, chances are you’ve already put together a business plan . If not, it might be helpful to do so before exploring alternative options for a business startup loan. A business plan not only provides a roadmap to help you reach your performance and financial goals, but it might also be required when seeking alternative sources of funding. The next step is to explore these three alternatives to business loans from banks:

1. Crowdfunding

There are a couple of reasons more startups now use crowdfunding to finance their businesses. For one thing, hundreds of platforms are available beyond early pioneers like Kickstarter and Indiegogo. What's more, the JOBS Act has allowed crowdfunding to be used to offer and sell securities to the general public. Crowdfunding provides an opportunity to raise money from hundreds or even thousands of individual contributors or investors. However, you’ll need strong marketing skills to spread the word and convince people to contribute. There’s also no guarantee you’ll raise the amount of capital needed to meet your financial goals. Three types of crowdfunding campaigns are available:

Donation-based crowdfunding, where money is contributed that doesn’t have to be paid back (though contributors often get gifts in the form of free products)
Debt crowdfunding, where contributors act as individual lenders and are repaid in monthly installments
Equity crowdfunding, where you offer company shares in exchange for investments

2. Friends and Family Loan

When it comes to friends and family, a low credit score should't be an issue. If you have people in your life who may be willing to invest in your business, pitch to them just as you would an actual investor. Make a written plan for the loan with details on repayment, terms and if you'll pay interest. Even though they're loaning you money as a favor, it's best to create a real plan and stick with it to avoid losing relationships over cash. Be careful, if things go south you could permanently alter friendships and familial relationships so you need to be willing to take this risk.

3. Credit-Card Based Financing

Credit cards are a popular financing option for businesses that can’t get bank loans. The funds are easy to access and you can improve your credit score by making payments on time. That said, interest rates on credit cards can be high, especially if you have a low credit score. It’s not always easy to get the funding you need via credit cards, either. If you’re applying for a personal credit card, your credit limit probably won’t push much above $8,000 to $10,000 even with a decent credit score. Limits are higher for business credit cards — up to $50,000 or more with the right issuer. But again, a lot depends on your credit score. Additionally, getting larger funding amounts via multiple credit cards can be tricky if you don't know which banks to go to or how to approach the application process. These are things you can do to ensure the best terms and highest limits:

Clean up your credit score by fixing errors and reducing your debt load
Make payments on time
Grow your annual income
Apply at the right time (e.g., don’t apply right after applying for credit elsewhere)

If you’re unsure how to proceed, Seek Business Capital offers consulting services to help you find the right mix of credit cards to reach your funding requirements.

4. SBA Loans

U.S. Small Business Administration loans are only available to business owners who applied for conventional small business loans but were rejected. The SBA doesn’t lend the money itself. Instead, it acts more like a guarantor. Banks, credit unions and other lenders provide the actual money while the SBA backs the loan to reduce the amount of risk involved. SBA loan amounts vary depending on the type of loan you get. Amounts range from a maximum of $350,000 for SBA Express loans to $5 million for SBA 7(a) loans. Interest rates and maturity terms also vary by loan type. To qualify for an SBA loan, a business must:

Be a for-profit enterprise
Not be engaged in illegal activities
Be engaged in, or propose to do business in, the U.S. or its territories
Have reasonable owner equity to invest

The SBA has a list of required documents you must file to get approved for a loan, including the following:

Loan application
Personal financial statement
Balance sheet and profit/loss statements
Projection of income and finances
Signed business U.S. tax returns for the previous three years
Signed personal U.S. tax returns for the previous three years

Lacking three years of business financials is common for new businesses or startups. For that reason, alternative financing options like Seek Capital should be explored. Related: Rejected for a Business Loan? 5 Next Steps to Take

The Bottom Line

Before pursuing an alternative business loan, think about which option is the best fit. For example, if your business generates a decent income and your credit score is above average, you’re a good candidate for an SBA loan. If your business is just launching but you have a good credit score, then credit card financing might be the way to go. If you’re a startup with a poor credit score, your best bet might be crowdfunding. No matter which option you choose, make sure you do your homework to get the best possible terms and avoid hidden fees or charges. More From Seek

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