When a small business owner thinks about needing to take out a loan, he or she is most likely filled with a sense of dread. Will I have to spend weeks compiling an application? What if I am denied? Does this mean my business is performing poorly? If these thoughts and fears sound familiar, it’s time to get reintroduced to small business lending.
Will you have to spend weeks compiling an application? Well, given that banks are lending to fewer and fewer small businesses each year, a new crop of alternative lenders have popped up to fill the void. These alternative lenders have simple applications, and the time from application to funding can be as little as two days.
Will you be denied? Alternative lenders are positioned to take on more risk, with loan approval rates of about 60 percent — which bodes well for your future application.
Is your business performing poorly? To be completely honest, businesses don’t usually seek funding because they’re doing poorly; they look for funds because they’re growing. Often times you don’t have the cash on hand to keep up with the growth, so you need the funding to handle various needs as they arise.
Now, there are some unexpected situations that could cause you to seek financing, but those are often created by external parties, and not yourself. Let’s take a look at a few examples of why your small business might need funding, and a good solution for each.
Funding for emergencies
As you well know, business is completely unpredictable. You will have moments of “emergency” that come about and you might not have the cash to cover them. For example, could your inventory sell out at such a high rate that you are unable to order more until next month? Or, do you need to pay back your suppliers but you’re waiting for your biggest account to pay you before you have the cash to do so? The list goes on and on, but these “emergency” moments present a time-sensitive need to get cash in hand. And that’s OK!
While it is best practice to keep three to six months’ emergency cash in the bank, if you find yourself in an emergency situation, many alternative loan options are an excellent fit.
If you are waiting on a customer to pay you in order to fulfill your own financial obligations, for instance, you could finance that invoice, selling the debt to a lender who will upfront you around 80 percent of the invoice total, holding the remaining amount until the customer pays you back. They return the remaining amount, minus their fees, once the invoice has been paid. Many alternative lenders also offer short-term loans. These are loans that are paid off in three to 18 months. They give you the money you need for this particular emergency, without leaving you stuck with payments for years to come.
Funding for equipment
Most businesses require essential pieces of equipment to help them do what they do. Whether that’s computers that help you complete your service, or machinery that helps you produce your products, the time will come when you need to upgrade or replace your equipment. This isn’t a sign that you’re doing things wrong. It’s simply a day-to-day need of any business.
Equipment requires a large amount of capital to acquire. Luckily, there are many options that allow you to finance equipment.
An equipment loan allows you to avoid major upfront costs when your business needs an equipment upgrade. If you’ve ever taken out a car loan, you have an idea of how an equipment loan works. The equipment serves as collateral to secure your loan. The loans are usually made at fixed interest rates — generally between 8 percent and 25 percent — and offer a fixed-term length so that your monthly payments are always the same.
Investing in your growth
The great thing about getting a loan when business is good is that it will make you a stronger loan applicant.
The most popular reason small businesses need funding is when things are going well. It could be that they want to acquire another business, add a location, or increase their service offering. To do this, though, they need a capital investment.
Taking out a loan to fuel your growth is a wise decision only if you can calculate an outcome for the invested capital. You want to make sure you are going to make more money than you are taking out. It’s your typical cost/benefit analysis. The great thing about getting a loan when business is good is that it will make you a stronger loan applicant. Business revenues are huge factor in evaluating your loan application, so if sales are strong, that speaks highly to lenders.
These are just a few reasons your small business might need funding. The alternative lending industry is booming, offering many, many great options to small businesses. However, navigating through this young industry can be a bit intimidating. If you would like to learn more about types of alternative loans and which might be right for your business, join us for a special Google+™ Hangout at 9 a.m. (PST) Wednesday, Oct. 1.
