Seeking capital is traditionally difficult for most startups. Banks only often want to fund companies with at least a five-year profile of a healthy business, which is unfavorable to most new and small businesses.
Fortunately, alternative business financing methods are now available and very accessible for startups and small and medium-sized enterprises (SMEs). By “alternative,” it means the loan doesn’t come from traditional lenders and has no outdated, labor-intensive lending processes.
Some examples of alternative financing include venture capitalists (VCs), angel investors, partner financing, invoice financing or factoring, and microloans. Each has its requirements, but most of them require you to do the following to be eligible:
Determine How Much Loan You Need Upfront
There are various loan amounts available in the business loan alternatives market. For example, startups can easily borrow a $500 loan from online lenders or up to $500,000 (or higher) through the best small business loans.
Avoid borrowing funds more than your startup needs. Otherwise, it’ll likely result in more costs. For example, lenders may charge a prepayment penalty. It’s a way for lenders to compensate for the loss on interest payments because of a borrower’s early payment.
Avoid borrowing too little as well. If you run out of funds due to an insufficient budget, borrowing more will help but also cost you more. The idea is that the more loans you have, the more interest and fees you’ll pay.
The key is to borrow “enough” funds. Determining how much is just enough requires research and forward-thinking. When doing so, consider these four factors: loan purpose, business finances, growth potential, and the loan’s total cost (interest rate, repayment schedule, fees, and other charges).
Write A Business Plan With Financial Projections
A business plan documents a company’s core business activities from financial, marketing, and operational standpoints. It also shows the company’s road map on how it plans to achieve its goals.
Financial projections are part of a business plan’s financial standpoint. It’s the estimate of a company’s future financial performance by analyzing its past performance, current business trends, and other relevant factors. This analysis is called financial forecasting.
Besides being useful for a company’s internal decision-making and planning purposes, many alternative funding sources (like venture capitalists and angel investors) demand to see your startup’s business plan with financial projections. This gives them an idea of how likely your business is to succeed in the future.
The more lenders think your startup will become profitable and grow, the less risk they see in your business. This encourages them to offer you higher borrowing amounts and better loan terms.
Know the Market and Industry’s Conditions
Market research helps companies understand consumer behavior and economic trends, allowing them to confirm and improve their business ideas. It also lets them reduce risks, identify and solve issues, and explore new opportunities for business growth.
Doing market research lets you know the conditions of your startup’s industry too. This is important since most lending companies will likely approve loan applications of companies in growing industries.
As such, besides presenting your business plan with financial projections, prove that your company’s sector or market can prime your startup to grow and succeed when applying for an alternative business loan. Doing so increases your chances for loan approval and demonstrates your knowledge as an entrepreneur and business strategist.
Check and Improve Credit Score
Low credit scores are usually immediate disqualifiers for loan applications. Most traditional and other alternative lenders see startups as high-risk borrowers since they often have no established and steady revenue, profits, cash flow, or assets yet.
The good news is that funding options are available for startups. Here are some examples of newly established businesses with no revenue yet:
- Equipment financing – loans based on the value of equipment, which acts as collateral itself; and
- Microloans – loans up to $50,000 are usually available at government agencies like the Small Business Administration (SBA), nonprofit organizations, and peer-to-peer agencies; and
- Small business credit cards – allow businesses to borrow up to a predetermined credit limit with valuable perks for startups like cash back on office supplies, but based on your credit score and future revenue.
As noticed, even with alternative funding, credit scores matter. That’s why it’s in your startup’s best interest to improve both your personal and business credit score, ideally before seeking capital. After all, businesses can leverage excellent credit scores into great deals on loans and other business costs, including rent, insurance premiums, and phone plans.
Final Thoughts
As with any crucial small business decision, don’t explore non-bank business loan alternatives alone. Help is always available. Consider seeking advice from small business experts and attend relevant training like those provided by the SBA.
These professionals can help you obtain the working capital and business tips your startup needs to thrive. While they may require fees, they’re much less than the potential loss you’ll risk when running a business with insufficient business knowledge.