Priyanka Prakash is a finance specialist at Fit Small Business, a New York City-based educational site for small business owners. A former business attorney, Prakash now helps entrepreneurs understand credit scores, alternative lending, cash flow management and other financial topics.
What financing options are available for small business owners beyond conventional bank loans?
If you’re just starting out and have a consumer product like electronics, crowdfunding on Kickfurther or Indiegogo could be a great option. If you just need a small amount of money and have strong credit, you could consider a personal loan from a company like Lending Club. Businesses that have been operating for at least one year might consider short-term online lenders like OnDeck and Kabbage. Businesses that have been operating for at least two years may want to visit a marketplace lender like Funding Circle.
What are the positive and negative aspects of alternative financing?
There are two main advantages to using alternative financing — it’s fast, and it’s more accessible. Whereas banks usually take three to four months to process a loan and often have 30-plus hours of paperwork, alternative lenders can get you funding in as little as one business day. The application process is generally completely online, and there’s very little or no paperwork. In terms of access, banks typically cater to a very specific borrower, a high credit borrower with a high revenue business. Alternative lenders are more willing to work with lower credit borrowers and startups.
The primary downside to alternative financing is cost. You pay more for speed, convenience and access. Some short-term lenders, for example, have APRs ranging from 40 to 80 percent. This is 10 times higher than bank rates! That being said, many online loans are paid off quickly, which means your total out-of-pocket cost may actually be lower than what it would be on a long-term bank loan.
What are the best options for startup capital?
- Crowdfunding. Thousands of startups have used crowdfunding to raise money. This works best for businesses selling consumer products, like gadgets and apparel. On sites like Indiegogo or Kickstarter give contributors a reward like a free product sample. This means there’s no debt to pay, which is a huge benefit when you’re just trying to get a business off the ground.
- Personal/P2P loans. If you have a personal credit score in the high 600s or greater, you might be able to get a peer2peer loan from Lending Club, Prosper or a similar site. The process is quick, and there’s virtually no paperwork.
- Rollover for Business Startups (ROBS). A ROBS lets you rollover retirement funds from a 401(k) or other eligible retirement accounts into your business without paying income taxes or early withdrawal penalties.
- Credit cards. A lot of people forget credit cards when financing for business, but credit cards are convenient and fast, and you can earn rewards points or cash back! Just be sure to use a business credit card so you’re not mixing personal and business finances.
- Family and friends. This tried and true option may work for some small business owners. Just make sure you present a well-thought-out business plan to your family member or friend and formalize the loan in writing, for both your protection and theirs.
“Alternative financing methods get a bad rap for being too costly,” says Prakash. The advantage of an online, short-term loan is that you will get out of debt faster than with a long-term bank loan. “However, for NYC-based small businesses, many of which have high rents and operating costs, the higher monthly payments may not be manageable. In such cases,” Prakash advises, “it may be worth it to try to build up your credit and get a bank loan.”
This article was written by Gillian Burdett for Small Business Pulse