For most entrepreneurs, starting a new business is an exciting experience but securing the necessary funding can be a challenge. A lot of new businesses, especially ones with patchy credit history or collateral, often find no takers from traditional banks! But with the changing lending landscape, non-traditional small business financing options have come up, offering alternatives that can give a new lifeline to new entrepreneurs to get the funding they need to grow their businesses.
In this article, we will explore alternative funding options such as merchant cash advance loans, fintech lending platforms, and crowdfunding, along with tips to improve your loan approval chances.
Why Traditional Banks Reject New Businesses?
Traditional banks are set up on very specific rules and they often hesitate to fund new businesses for a variety of reasons. The stringent criteria of these banking institutions include a solid credit score and a stable revenue history, which many new businesses lack in their early stages of operation. Add to that, limited credit history of startups make them a higher risk in the eyes of these traditional banks. And without collateral, it can be difficult for banks to lower this risk.
These bumps may leave many new businesses in a difficult position when it comes to small business financing. But, with the rise of non-banking small business financing solutions, there is new hope as entrepreneurs now have more than one option to raise funds for their businesses.
What are Alternative Business Loans Available for Startups?
Today, most new businesses understand that traditional banks are not their only option when it comes to small business financing. There are alternative business loans available. These loans are mostly provided by online business lenders and fintech platforms, offering more flexibility and faster approval processes compared to traditional banks.
- Fintech Lending Platforms
The emergence of fintech companies like Biz2Credit has transformed the small business financing landscape. Using cutting-edge technology to streamline the loan application process, these platforms tend to look beyond the traditional data points like credit scores while analyzing an application. They often use data such as cash flow, business performance and digital transactions records to make lending decisions.
These institutions are willingly to take more risks than traditional banks; sometimes offering loans based on a business’s current financial situation rather than the past. They also provide loans at a faster speed than traditional loans, and this makes fintech lending solutions an attractive option for businesses looking for urgent capital.
- Merchant Cash Advances
For businesses with steady credit card sales, a merchant cash advance (MCA) can be a good small business financing option. It lets businesses borrow funds against future sales by providing a lump sum capital upfront in exchange for a percentage of daily sales until the loan (and fees) is repaid.
This type of small business financing option works well for enterprises that have steady sales but not a great credit history or collateral. However, borrowers should be aware of the higher overall cost of the loan compared to the traditional loans, as the repaid is linked to sales volume. A cash advance for gig workers can offer a similar benefit, providing quick access to funds based on expected earnings without the need for strong credit.
- Crowdfunding
Another alternative small business financing option for startups to consider is crowdfunding. With this method, startups can raise money directly from their target audience without any repayment expectation. Platforms like Kickstarter and GoFundMe have made this concept into a reality for startups. Enterprises often offer rewards or sometimes even equity stakes to backers (although not mandatory) in exchange for their contributions.
Unlike MCA, this is not a quick lending solution. It requires a campaign, which can act as a marketing tool too, to raise awareness for funding as well as generate buzz.
How to Improve Loan Approval Chances for New Businesses
If you are at the exploration stage of small business financing and you are looking at alternative business loans, it is important to improve your business’s financial transparency and business planning to boost your chances of loan approval. Here are some tips that can help you do that-
- Prepare a Solid Business Plan
A detailed business plan is a must for any loan application. It should clearly state your business’s goals, market research, revenue projections, and financial needs. Having a strategic plan in place for your business growth and loan repayment can just move the needle in your favor. - Keep Accurate Financial Records
As a borrower, you must ensure that your financial records are organized and updated. Keeping an accurate documentation of sales, expenses and cash flow will go a long way to making it easy for lenders to understand your financial situation. Any mistake here can derail the loan application process by weeks. - Build Business Credit
Building your business credit is crucial to getting small businesses financing of any kind. You can begin by opening a business bank account, getting a business credit card and ensure that you pay all business-related bill timely. Gradually, all these actions will boost your creditworthiness, making it easier for you to secure loans in the future. - Consider a Co-Signer or Collateral
Lack of credit history or collateral has been one of the many reasons why startups fail to secure adequate funding from lending institutions. In this case, new businesses can bring a co-signer with a stronger financial background. But if you have some form of collateral, such as equipment or real estate, to offer that will help reduce the risk for lenders and make you a viable loan applicant.
Conclusion
Small business financing is a tricky area. While traditional banks may not be ready to take the necessary risks, there are many alternatives for startups looking to raise capital for their firms. There is no shortage of creative solutions to obtain funding. The key here is to analyze each option carefully, understanding the pros and cons, before making any decision. Always remember, rushing into a loan application may put your business’s financial health in jeopardy in the future.
