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Where to go when the big banks say ‘no.’
You’re ready to begin your new small business or take your current business to a new level. You’ve done your research about small business loans and have learned what you need to apply for a loan. However, while the big bank you met with to get your loan loved your idea, your financing was rejected. Now what?
Luckily, there are many ways to secure financing to start or grow your small business. Here are just a few.
Community banks
If you’re more comfortable getting a loan through a bank, consider your local community bank. Local banks have a vested interest in helping their communities, along with those living and working in them, and the line from you—the borrower—to the bank’s ultimate decision maker is often shorter than that of big banks.
When talking with any bank, keep the following in mind and choose a lender who:
- You can build a strong relationship with
- Has some experience in your industry and understands your business
- Is capable of handling special needs, such as international transactions
- Is financially stable (Check the FDIC’s Bank Data & Statistics section of its website or view Bankrate.com’s “Safe & Sound®” bank rating system.)
- Asks only for a reasonable amount of collateral against your loan
- Often deals with small businesses (Your local small business association can provide you with such a list.)
Venture capital
Venture capital is funding provided to help early-stage, high-potential companies by an investment firm. Typically the venture capital firm is given an ownership stake in the company it is lending to.
When talking with a venture capital firm, it is important to:
- Have a strong working knowledge of accounting in order to hold conversations about your company’s profitability.
- Have strong communication skills to sell your company’s potential.
- Network with other entrepreneurs and professionals in the venture capital community, such as lawyers, accountants and marketing strategists.
- Make every contact count. Even if you weren’t able to raise funds, you are still making others aware of you and your company with every firm you speak to.
Peer-to-peer lending
Peer-to-peer lending networks connect individual borrowers with individual lenders, eliminating the need for a bank or investment firm. Borrowers apply for a personal, unsecured loan for use in their small business. Lenders can provide either a portion of or the entire loan.
Interest rates are applied to loan amounts and the company overseeing the transaction typically charges a fee as well (usually a percentage of the loan). A number of peer-to-peer lending organizations exist and each has its own terms and conditions, so you’ll want to do some research to find out which best suits your needs.
Here are a few to help you get started:
- Prosper.com is the first and largest U.S. peer-to-peer lending marketplace. Borrowers can apply for an unsecured personal loan of $25,000 or more as long as they:
- have a credit score of 600 or greater,
- have been in business for at least two years, and
- have a storefront or business facility.
- Zopa.com is a British-based social finance company that provides an online lending service that is similar to Prosper.com. It has expanded across the globe and has a U.S. presence as well.
- Kickstarter.com focuses on funding creative projects (such as art, music and film). Funding here is all or nothing—funding goals must be reached or exceeded before any money changes accounts. Project creators keep 100 percent ownership of their work.
Private loans
You can also secure funding for your small business by asking family, friends, professional peers and acquaintances for a loan. Make a list of everyone you know and determine:
- who you would feel comfortable being financially connected to,
- who can afford the investment, and
- who has the business experience and trust in you to believe in your company.
Once you find those willing to invest in your business, determine the terms and conditions of that investment. Is the money a loan to be repaid by a certain date with a certain interest rate? Is the investor given a stake in your company or a share of your profits? Write it down, talk with a lawyer and have both parties sign the agreement to prevent any future misunderstandings.
Remember, securing financing for your small business requires patience, planning and persistence. With that combination, may your small business persevere!
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
Sources: Entrepreneur.com, peerlendingnetwork.com, prosper.com, us.zopa.com, kiva.org, kickstarter.com, ABCNews.com
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