Small business loans can give you the capital you need to launch or expand your business. If your company has poor credit or doesn’t have much credit history, however, securing a loan can be difficult. In 2018, 33% of businesses that applied for a business loan didn’t qualify. So if you’re having trouble securing a loan, you’re not the only one.
Luckily, small business loans aren’t the only way to get funding for your business. You might be surprised at the various possibilities in financing options, including small business grants, personal and business loans, credit cards and crowdfunding.
Small business loans at a bank
Depending on your credit score and history, you may be able to qualify for a loan through a bank or credit union. They typically offer two few different types of business loans: term loans and lines of credit.
Term loans are one of the most common types of business loans. If you qualify for one, the bank will give you a lump sum of money that you’ll be expected to pay off over a set period of time, which is called a term. Terms range from a few months to a few years and interest rates vary based on creditworthiness.
If you need a more flexible way to manage your company’s cash flow, you can apply for a line of credit, which is similar to a credit card. If you qualify, you’ll be given a credit limit by the bank. You’ll be able to borrow money up to that amount whenever you need it. Once you start borrowing money, you’ll have to make at least the minimum payments, but those repayments will be added right back to your credit limit.
Lines of Credit
Lines of credit are a great way to manage cash flow, cover emergency expenses and pay for regular operating costs. However, since it’s considered more of a risk than regular term loans, it comes with higher interest rates. It is easier to qualify for than term loans, though, and don’t usually require collateral. So it’s a good option for businesses that need more financial flexibility than term loans offer.
SBA loans and grants
If you have an established business with a good credit history, you may be able to get a loan through the Small Business Administration (SBA). The SBA partially guarantees small business loans from banks and credit unions, incentivizing banks to loan money to small businesses. These loans typically have very favorable terms and low interest rates, which is why this product is so popular and hard to get. The application process is known to be long and difficult, but it’s worth it for a chance at reduced interest rates.
The SBA has a few different loan programs you can apply for, including the 7(a) program and microloans. The 7(a) program provides loans of up to $5 million for expansion, equipment purchases and almost any other business expense.
As you can guess from the name, microloans provide less funding. It’s capped at $50,000, but it’s much more accessible to startups and people with average credit. The funds can be used for starting a business, buying inventory and other crucial business expenses.
If your business is doing socially important work, such as conducting scientific research or providing entrepreneurial advice to veterans, you may also be able to qualify for small business grants through the SBA. These grants provide significant amounts of free funding, so they’re worth looking into. The SBA website has a full list of small business grants and eligibility requirements that you can check out to determine your chances of qualifying.
If you don’t qualify for SBA grants, you may still be able to get a grant through your state or local government. You can visit grants.gov to get more information and see which ones you might be eligible for.
Small business crowdfunding
If you don’t qualify for small business loans or grants, crowdfunding is a good way to secure part or all of the funding you need. In addition to helping you raise money to launch or grow your business, crowdfunding can help you gauge the level of interest in your product, generate buzz about your business and build a customer base.
There are two different types of crowdfunding that you should consider: equity-based and rewards-based. Equity-based crowdfunding gives each of your donors a small stake in your company in exchange for cash. This type of crowdfunding is regulated and has some complicated rules, so be sure to work with a financial consultant to understand them before you start your campaign.
Rewards-based crowdfunding, on the other hand, doesn’t leave you with a group of investors. Instead of giving your supporters company shares, you’ll give them a gift for donating, like a handwritten card or company swag. This type of crowdfunding has fewer rules and regulations and works especially well for B2C startups that are trying to launch a product.
Setting up a crowdfunding campaign is free and low-risk, so it’s something every small business should try. Don’t get discouraged if your campaign isn’t successful, though. Only half of all crowdfunding campaigns get fully funded, and successful campaigns don’t raise much money. In fact, most successful campaigns generate less than $10,000 in donations. So if you need more money than that, you’ll have to find alternative funding methods to fill the gap.
Small business loan alternatives
If your business is new or has poor credit, it can be tough to secure a small business loan. There are a number of alternatives you can look into, though, such as tapping into personal savings, getting a business credit card or applying for a personal loan.
One way to get an immediate infusion of cash for your business is to take money out of your savings or retirement account. Using your savings to fund your business is risky, though. If your business goes under, you could lose your livelihood and most of your nest egg, too.
To reduce the risk of funding your business with savings, you should leave at least $5,000 in your savings account for emergencies. That way, your personal savings aren’t totally depleted and you’ll have enough money to cover both personal and business emergencies in the future.
Another way to fund your business is to get a business credit card. Applications for business credit cards are mainly based on your personal credit score, so even if you have poor business credit, you may qualify. When used responsibly, business credit cards can help you manage gaps in cash flow and build your business credit score, so they’re a good option.
Another thing you can try is applying for a personal loan. Personal loans are usually easier to qualify for than business loans, especially if you have a good credit score. Most lenders offer personal loans up to $50,000, so getting one could provide enough cash flow to keep your business going.
Paying back small business loans
Defaulting on a loan can have lots of negative consequences for your business. Your company’s credit score will suffer, you could lose access to loans and other forms of credit and you may even face legal problems. That’s why it’s so important to make paying off your small business loans a priority.
Whether or not you’re behind on your payments, you should take a look at your budget and try to find ways to save money. Reducing your business expenses and cutting unnecessary costs will make it easier to pay off your loans.
You should also have a system for paying your bills so that you don’t miss payments. Some business owners choose to set up automatic payments, while others have a specific day for paying bills so that they don’t forget.
And if you ever do get behind on your bills, it’s important to contact your lender right away and let them know what’s going on. They may be able to offer you refinancing options or temporarily suspend payments until your business gets back on track.
The bottom line
Small business loans can be hard to qualify for, but they aren’t as difficult to get as you think. If you review your finances and shop around, you may be able to find a lender that meets your needs. Even if you don’t qualify for a loan, you shouldn’t give up on your dream of starting or expanding your business. There are a number of alternatives to loans that aren’t dependent on your credit score, including small business grants and crowdfunding campaigns.