Traditional bank loans are harder to get than lenders might make them sound. The banking industry has not recovered from the beating it took in 2007. They are still super wary of making business loans, especially to smaller businesses which do not yet have a long track record of success.
Don’t despair! Even if you have a great plan and strategy and still got turned down by your bank, this is not the end of the road. There are small business loans available if you know where and how to look. Some simple steps can increase your chances of getting that loan. And today more than ever there are creative alternative funding sources out there for you to try. Some of them are definitely worth your time and attention. Others should be avoided.
We’re here to help you tell the difference. Not every funding method is right for every business. You will have a greater chance of success if you appeal to those that are a good match for your venture.
Most importantly: never to give up. If this is your dream then be prepared to do what it takes to go for it. And do that well armed with good solid information.
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New Lender June 2019 There are more and more lenders stepping in to take advantage of the negative experiences many small business owners have had with banks over the past 10 years or so. And though banks have improved the new lenders still have a lot of appeal in terms of ease of getting approved, speed with which money can be obtained, etc. For example SeekBusiness Capital advertises that you can get pre-approval within two hours with a n application time of just 2 minutes and no need to provide financial details or tax returns. And they even welcome start up businesses, which banks often will not. Loans up to $500,000 are available. That sounds pretty appealing and worth a try, but do be sure to read the reviews.
News September 2018 It might be time to reconsider giving banks another try. If you’ve been disappointed in the past trying to get a loan at a bank it’s understandable that you’re reluctant to try again. But according to a recent report from the Wall Street Journal, bank lending is picking up. This is a major change from the slowdown that started back in 2016. The current increase in lending is judged to be a direct result of the hugely improved economy and the favorable outlook for businesses. No longer hampered by election concerns, excessively high taxes and unnecessary regulations businesses are more willing to borrow and banks are delighted to see their business loans picking up. And many banks are getting more flexible in order to compete with other lending options
Update April 2018
Do you prefer to do business with someone you kind of know, but you don’t have a relationship with a bank? If you have a PayPal account or have used them for any services you might want to check out their loan service called LoanBuilder. If you’re eligible and you have all your paperwork put together you can get approved and funded really quickly. It’s easy to go online and check your eligibility in just a few minutes. If you’re eligible you can “build” your own loan by choosing the amount you’d like to borrow and the amount you want to take to pay it back. It will then show you the weekly payment amount and the grant total you will pay back over the life of the loan.
Update March 2018 Bankers appear to be perplexed by a recent drop-off in their small business lending business. At the end of 2017 their loans to businesses had increased just over one percent in the previous year. The weekly growth rate averaged less than 3%, unlike weekly growth of over 9% in 2016 and even higher growth prior to that. What we find perplexing is the bankers’ surprise. They seem to be assuming that there is pent up demand which may be unleashed soon, but we wonder if they are not aware of the many other options out there these days? The increase in in new options coupled with many people’s disappointment with previous bank-borrowing experiences could certainly explain a downturn in the banking business.
Update October 2017
A former Obama administration cabinet member recently told a London audience at the Lendit Europe finch conference that she expects Amazon and Google to dominate the small business loan arena. As we have reported elsewhere, Amazon has already made over a billion dollars in loans to small businesses through its website. That’s a natural since they already have a relationship with their merchants and can also easily assess their creditworthiness. Google is also in a strong position to assess potential borrowers since they have such a wealth of information about everyone who uses their platform. Will this result in a call to require major tech companies to have a bank charter — and lots more regulation? It’s a possibility but only time will tell … and it will be interesting. In the meantime if you’re looking for a small business loan keep an eye out for offers from Amazon and Google…
Update June 2017 If you’re considering looking at an online business loan there are many options to consider. According to NerdWallet you will find easy applications without much paperwork required and a higher probability of getting your thumbs up within a day or even less at ondeck and at Kabbage. The rates will be higher than you might get a bank, but those loans are tougher to get and take a lot longer, so it’s a toss-up. Kabbage comes out a bit better in their ratings but it depends on what different criteria are important to you. Ondeck will let you take 36 months to repay while Kabbage cuts the repayment term off at 12 months. Check them both out and see if one of them looks promising for you.
News Novmber 2016 Online business loans have become pretty abundant but they can also be confusing. The confusion comes from trying to sort out what the actual costs will be of a given loan. Now several lenders have joined together to “self regulate” by agreeing on a standard way to show the costs of borrowing from them. They have come up with a “disclosure box” that will show the loan’s cost relative to apr (annual percentage rates), the total amount that will be repaid (including principal and interest), and some other standard measurements. These are very promising moves, especially since the U.S. Treasury Department has recommended an increase in oversight and rules for protection of small-business borrowers. The three participating lenders (as of this writing) are CAN Capital Inc., Kabbage Inc. and On Deck Capital Inc.
News March 2016 Microfinancing is becoming more prevalent in the United States. Helping to make it more “mainstream”, the Small Business Administration now has a microfinancing program. Small Businesses can now get smaller loans for a variety of purposes. See more details (and learn more about the benefits of microfinancing) in our article about Microfinance Opportunities in the United States.
NEW: Announced in February 2015, the Lending Club and Alibaba have teamed up to offer loans to businesses that buy from Chinese manufacturers through the Alibaba marketplace. The lines of credit for these purchases can be from as little as $5000 up to $300,000, for up to six months. Monthly loan rates will range from .5% to 2.4%. This alliance is part of Lending Club's desire to increase its share of the small business loan market – which is reportedly the biggest part of the “alternative lending” market.
Clearly alternative lending options are becoming more and more popular with small business. So if you order items from China as part of your business check out Lending Club and Alibaba.
December 2015 News Large U.S. banks are making fewer and fewer loans to small businesses. According to a report in the Wall Street Journal, big bank small loans were down in 2014 almost 40% compared to 2006. And they are the source of a declining percentage of loans up to $1 million —43% in 2015 compared to 58% in 2009. It’s not surprising then that small businesses are turning to alternative sources of loans even though they tend to be more expensive. Rates at some alternate lenders can come close to charging 40% on average. And for some big banks credit cards have become a prime source of business lending since loans cost them a lot less to originate. They tend to be a better deal for businesses too, since rates on small business cards average around 12.85%. Read on to learn more about both traditional and alternative loan sources:
Family, friends and credit cards: The easiest and most obvious places you can borrow money for your small business are from your friends and family, and from new or existing credit card balance limits. Be aware of the pro’s and cons of each approach:
- Family and friends may be enthusiastic and eager to help you and might even help you with the business;
- Nonetheless you must be aware that things can turn sour and get awkward very quickly. Even if they are willing to operate on a handshake, insist that the details of your agreement be put in writing.
- It’s totally easy to charge expenses on your credit card or to take an advance in the form of cash. Banks make it so easy because they make a lot of money on your balances! It’s very tempting to think you are doing fine because you are paying the minimum each month. But your total amount owed is growing all the time and can become a burden you can no longer bear. Know the actual rate you are paying so you can evaluate other options.
Home Equity Line of Credit or Mortgage Re-Fi: These loans require paperwork (sometimes lots of it!). Qualifying depends on your credit history, verifiable income and the amount of equity you own in your home. You do not have to present a business plan or convince anyone that you will be able to make a profit. You do have to go through the time and expense of an appraisal and the application process.
Grants: The most obvious benefit of a grant is that it is essentially “free money” that never has to be paid back. The biggest drawback is that a true grant for an individual to start or grow a business is extremely rare. There are some out there but they are not easy to find. You should check your state and local governments for grants or other incentives for business, and also research grants which may be available from private foundations. If you are lucky enough to find such a grant it will most likely require that the funds be used in very specific ways for specific purposes, so be prepared to be flexible. You can learn more at Grants for Small Business.
Business Loans: Steps to Success: When you are looking for a small business loan there are some basic steps that will be critical to your success. They may seem obvious but you’d be surprised how many people don’t do a good job thinking on their feet when faced with questions they haven’t really thought through. As a first step, be able to clearly explain what you need the money for. Are you just beginning your business and need start-up funds? In that case you’re very unlikely to get a loan so you’re better off checking out the resources described in Fund A Startup Business. If you’re already up and running you might need working capital for day to day expenses or you might need to purchase some equipment. Be prepared to explain what the money will be used for and how it will help your business succeed. Or perhaps you want to do a special advertising and/or social media campaign — you’ll have a better chance of getting the loan if you can show careful plans about what you plan to do, how much it will cost, and what sort of returns you expect to receive and why. These steps help demonstrate that you are a knowledgeable and responsible business person — and probably a good credit risk. Following are some places to look for loans:
Credit Unions: Credit Union loans can be a great option for small business. Credit Unions are owned by their members and are not-for-profit. They typically pay higher interest rates on savings and charge lower rates on loans. Their loan requirements can be more flexible than traditional banks. And many also offer lines of credit as well as SBA loan programs. These are definitely worth a look!
Small Business Bank Loans: These are still hard to get, even with the friendliest of banks. Banks are highly unlikely to fund a new business that can show zero existing revenues or profits, regardless how great your plans look or how innovative your idea. Banks are simply not in the risk-taking business! However, if you do have a solid business plan in writing, and you have evidence that your strategy will result in profits, you may have a chance. You may have to go not just to the closest three of four banks you are familiar with, but to dozens of banks. Keep trying and you may get lucky. It may be frustrating but persistence sometimes wins the day!
SBA-backed Small Business Loans: These are actually your best bet for a bank loan. And the SBA will help prepare you to increase your chances of success! Some people ignore the SBA because they don’t fund businesses directly. But they do guarantee loans at specific banks, which makes those loans much easier to get. And the new (she took office in the spring of 2014) head of the SBA has done a lot to streamline and simplify procedures. She has also increased the accessibility of small business loans, lowered their costs, and increased loan volumes going to women and minorities. Contact your local SBA office – they will help you and point you to the right banks. Learn lots more in our review of the Small Business Administration website.
How to Qualify for a Small Business Loan Your credit score has a big impact on your ability to get a loan - and on the interest you will pay. Especially if you are a new business, lenders will rely heavily on this score since it reflects you ability to repay a loan. So take some time up front to work on improving your current credit score. Pay all your bills on time. Check your credit report and be sure it does not contain errors; dispute them if they do. You can get one free credit report each year from AnnualCreditReport.com. You will need good credit scores to get a loan backed by the SBA. If you go with online lenders the requirements are not as strict (but of course you will pay a higher interest rate).
This is where things are getting very interesting. The Internet has made it easier for individuals to create and operate businesses with less capital than in the past. Start-up capital and ongoing operating expenses still do often require some cash from someone other than yourself. Happily, the Internet has some creative solutions there as well:
Small Business Crowdfunding: A combination of new legislation and technology has made it possible for entrepreneurs to pitch their idea online and receive money from individuals all over the world. It is an area of rapid growth with over $5 billion raised in 2013.
Some crowdfunding comes in the form of donations for which the donor simply receives some small incentive. Due to new legislation entrepreneurs may now use this technique to sell investors a stake in ownership of their company without having to go through all the SEC requirements of the past. Some sites focus on businesses, others on creative ventures, high tech ideas, charitable purposes, funding new mobile apps, novel inventions from tinkerers and inventors, and more. If you have a good story to tell and are good at telling it, this could be a great avenue for you. Because there are so many crowdfunding sites now we recommend you search for a site for your particular area. Learn more at Crowdfunding News.
Internet Lending Brokers: Sites like Lending Tree basically let you indicate what type of loan you are looking for along with some other basic information. Lenders then compete for your business. Tools are provided to help you evaluate different offers. This may be a time-saving option for you to enter information once and get results from more than one lender. You should be aware though that your options will be limited to lenders who pay for the privilege of responding … and once your contact information is out there it might be difficult to cut off the flow of emails you receive.
Microfinancing Institutions: These organizations, also called MFI’s, provide loans to individuals who want to start a business but don’t have a banking relationship, credit history, or knowledge about how to get a loan. They provide funding, training and support to help people be successful. Interestingly, some non-profit MFI’s also allow individual supporters to make small business loans to people and be paid back at a specific interest rate. They therefore benefit both would-be entrepreneurs, often in lower income areas, as well as those who want to help others in need. Learn more in our article about Microfinancing in the United States.
Regardless of ups and downs in the economy, owning a successful small business can be your ticket to a very special kind of freedom. There are so many new opportunities out there, funding really should not be something that holds you back. Review this information, make your plan, and go take this important step toward a new future!