Reading Time: 4 minutes How Business Owners Get Funding When Banks Say No
Your small business has been turned down for a bank loan, or you’ve been turned down for a personal loan. Perhaps you were looking for a retail location but had trouble finding good mortgage lenders willing to work with you as a new business owner.
While you might think this is game over, at least for getting the money you need, you’d be wrong. Several alternative financing options have popped up since the financial crisis, giving small business owners the flexibility they need to get funding when banks say no.
Option One: Revenue-Based Financing
A popular option for business owners is what is known as revenue-based financing. These loans are based on the cash flows of the business and not the assets or the company or the owner.
Some lenders in this space will focus on credit card receipts, while others will look at the net receipts of the company or even offer to finance based on the credit rating of a business’s customers.
In the case of the latter, this works best when the customer is a large public company with a history of doing business with your company and tends to pay on time.
Some business owners gravitate towards this form of financing because of the flexible repayment options as most lenders in this space will take a percentage of daily sales to service the loan.
However, this does come with a catch, as the marginal interest rates can also compound daily. This means that the interest due on a loan can increase, even when there are no sales. As such, you will want to check the fine print on the loan agreements before signing up.
Another thing to keep in mind is that these loans tend to be short-term and, as such, should be for short-term needs. But if this sort of line is what you think you need for your business, then you might want to research companies to see if their loan programs make sense for you.
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Option Two: Credit Cards
A word of warning: this is a highly tricky strategy, and it should only be taken if your future cash flows are stable. If not, you risk maxing out your personal and business credit limits with little chance of paying down the debt.
That being said, credit cards can be a good source of short-term financing for business owners – especially when they already have room on their credit cards to fund an emergency purchase. Just keep in mind that if you use credit cards to pay for business expenses, then you will want to pay off the entire balance during the billing period.
Another thing to keep in mind is that businesses can be heavy users of credit. As such, using your credit cards for business expenses might not be the best idea. While all business owners do this from time to time, it is not the best option over the long term as excess use of your credit cards could hurt your credit score.
Ironically, this could make it harder for your business to get the financing you will need. As such, get a credit card account set up for your business as soon as possible to ensure your company can access credit when needed.
Option Three: The Power of the Crowd
Besides short-term lenders and credit cards, there is a third option – the power of the crowd. While equity crowdfunding has been around for over a decade, few small businesses have pursued this option to get the funding they need.
When you are in the fundraising stages for startups, it will feel like you have a long slog ahead of you to get you where you want to be. The thing is, there are always ways that you can get funding for your business, and as long as you are researching every single option, you will find a way to fund your business and get it moving.
There are several reasons for this. First, most business owners don’t have the time to run an equity crowdfunding campaign. Second, space is competitive, making it difficult to hit fundraising goals.
Third, it can take time, with the average crowdfunding campaign taking 3 months from planning to financing.
But this doesn’t mean that crowdfunding isn’t for you. One of the advantages is that it gives you a chance to highlight your product or service to a larger crowd. Besides, conducting a successful crowdfunding round requires an integrated social media presence, which has added benefits for any business.
Start small if you are considering crowdfunding to get the money you need for your business. Conduct an initial round with a product or service you are about to launch, and then once that round is successful, use the momentum to perform follow-up rounds.
This strategy will help you test crowdfunding strategies, build relationships, and ultimately get the money you need.
Greg is a Chartered Financial Analyst (CFA) with 22+ years experience in Financial Services. He has held numerous FINRA Securities licenses (series 7, 63, 65, and 66), and is an expert on Investment Products and Financial Planning. Greg has 22+ years experience as a real estate investor and degrees in Psychology and Philosophy.
Greg has been quoted/interviewed in Yahoo Money, Yahoo Finance, USA Today, Authority Magazine, Realtor.com, Business Insider, and others.
Greg is an avid runner, and the father to identical twin girls and their awesome brother. His love of budgeting and his kids led him to join The Great Resignation in 2021.
Disclaimer: Any Financial Tips on ChaChingQueen are general and informational. Speak with a professional about your specific situation.