Access to Capital and Business Loans: Best Practices

Many small businesses struggle with the same problem: lack of access to capital. About 90% of small businesses say availability of credit is a major problem. And that makes sense – small business bank lending is down 20% since before the Great Recession.

Without financing, it may be difficult or even impossible to start or run a company. The good news is that you’re not limited to banks. So, what alternatives do you have? And what do they mean for your business?

Key Questions to Ask When Seeking Funding

Before you seek funding for your small business, you should perform a thorough and complete analysis of your business’s financial health and an assessment of your business plans and future needs. You’ll need to know your business credit score and have a clear business plan that details where the financing will go and how you’re planning to pay it back.

Business or financial coaches can help you answer these questions and prioritize your funding needs and goals. Organizations such as SCORE or Women’s Business Centers provide free coaching and mentorship to entrepreneurs.

You’ll want to review and answer all the following to make the best decisions for your business:

• What do you need the money for?
• How much do you need?
• How long should it take you to pay it back?
• What’s the current financial shape of your business?
• Do you have any collateral?
• How soon do you need the money?
• Do you want debt or equity financing?

Think Outside The Bank

There are several alternative funding options available for those who either do not quality for a bank loan or are looking for alternative financing. To name a few, you may be able to get financing from:

• Family
• Friends
• Personal savings
• Venture capital
• Angel investors
• Government
• Grants
• Savings
• Home equity
• Bank loans
• Sources of nontraditional funding
• Microloans
• Community lenders
• SBA loans (guaranteed)
• Crowd funding
• Online marketplace lenders

This means you have the ability to shop around and determine what option works best for you and the needs of your business. You may also choose to mix and match options for different aspects of your business or to get a larger total loan.

Let’s take a look at some of the lesser-known funding options:

Community Development Financial Institutions (CDFIs)

CDFIs cater to entrepreneurs who are typically ineligible for traditional bank loans. They offer loans of less than $250,000 to be used for a wide range of business purposes. In some cases, they also provide grants.

CDFIs seek to provide affordable lending for underserved entrepreneurs and low income communities, along with in-depth support and mentoring for the business owners, so they’re specifically designed to help you get your small business off the ground and on the road to success.

Learn how CDFI funding could help your business by exploring AOF’s options.

The Women’s Capital Directory is a great place for all entrepreneurs to learn about CDFI lending options.  The directory is searchable by location, time in business, and lending amount, among other filters.

SBA Loans

The US Small Business Administration (SBA) guarantees a portion of loans to provide incentives for institutions to lend to small business owners. You should note that the SBA is not the lender, but the guarantor who backs the loan amount.

The primary loan programs under the SBA are the 7(a) and CDC/504. These loans can be used for working capital, inventory, real estate, and more. Programs are also available for disaster relief, emergencies, or veteran and military members looking to start their own small businesses.

Find an approved SBA lender near you.

Microfinance Lenders

Microfinance lenders offer small loans to help small business owners get their businesses up and running. Their applications typically take into account more personal and character-related information about the business owner in addition to the standard financial and credit information that banks use, which means they’ll be more likely to give you a loan. They also frequently offer mentoring and other services to help guide you as you run your business.

Online Lenders

This is a newer breed of small business lending that uses technology to match lenders and borrowers, or even entrepreneurs and future customers. The application process is easy and the funds are delivered quickly, which can make online lending seem like the easiest possible option. Some sites offer direct lending from peers – this is called peer-to-peer lending and can connect you to both institutional and individual lenders. These loans are generally structured as term loans and are similar to traditional bank loans, but easier to get.

Others (like Kickstarter or GoFundMe) allow people to give a certain amount of money to your project in return for a certain product or benefit when you get off the ground.

However, this exciting new option does come with some caveats. It’s largely unregulated, and not all online lending platforms are reputable. Be sure to carefully read the terms and conditions to make sure you don’t get stuck with sky-high interest rates or other problematic small print.

For example, online cash flow lenders offer short term loans to be used as working capital. These loans typically have terms of six to twelve months at exceptionally high interest rates – sometimes as high as 90%. Merchant cash advances are another tricky type of online lending. They’ll give you cash in exchange for a portion of your future revenues, but they tend to be deceptive with their terms and you’ll be at a serious disadvantage if your business is more successful than projected.

Small Business Borrower’s Bill of Rights

No matter which lender you end up working with, you want to ensure your rights are protected. Make sure your lenders are following principles in line with the Small Business Borrower’s Bill of Rights, namely:

• Transparent rates
• No hidden fees
• Plain English terms
• Clear comparisons of all pricing and rates

The Bottom Line

It’s frustrating to apply for bank loan after bank loan and get turned away, but that doesn’t mean you need to give up on your entrepreneurial dream! You have lots of other funding options, so check them out and find the one that’s right for you and your business.