For most startups, the capital comes from bank loans. What many don’t know is that getting approved of a loan from a bank is one of the most daunting processes of entrepreneurship.
Due to economic fluctuations, banks have tightened their requirements for loan applications and, even if you show excellent credit history, there’s no guarantee that you will be approved of a loan. In March of 2020, when the coronavirus pandemic started seriously affecting the U.S. economy, big banks approved only 15.54 percent of small business loans, according to Biz2Credit’s Small Business Lending index. The approval rate went lower in April at 8.9 percent and only slightly rebounded in May at 11.5 percent.
These figures show how difficult it can be to get approved bank loans, especially for a startup. Fortunately, you don’t have to rely only on banks or your own money to finance your business. Today, plenty of entrepreneurs like you are turning to alternative financing options that don’t have requirements as strict as banks.
1. Business Line of Credit
A business line of credit is like a credit card for businesses. It is a type of small business loan where the lender grants you a sum of money from which you can draw from any time and you only pay interest for what you borrow. Say, you got approved of $100,000. You can borrow from this amount and repay anytime as long as you don’t exceed your limit.
2. Venture Capitalists
If you’re willing to share ownership of your company in exchange for the capital you need, then the help of venture capitalists might be something to consider. Venture capitalists are experienced investors, with excellent judgment about the capabilities of startups. So, for example, you want to open a landscaping company, not only can they finance the startup costs of your lawn care business, but they can also guide and mentor you as a business owner.
3. Crowdfunding Campaigns
Want to get the capital you need while also cultivating a loyal following? Then crowdfunding websites might be the way to finance your business. Through crowdfunding websites for businesses like Kickstarter, Indiegogo, and GoFundMe, you can introduce your business and start a funding campaign where people who believe in your business can donate to you.
If you have money saved to fund your business, but it isn’t enough, you might want to consider microloans. These are small amounts of loans, typically less than $35,000, offered at low-interest rates. Lenders often provide microloans for startups by disadvantaged or minority groups.
5. SBA Loans
The Small Business Administration (SBA) is a government-backed institution that helps small businesses get approved for the loans they need. The loan will not come from the SBA. Instead, they will offer lenders a guarantee for the portion of your loan, which means they will repay that portion of the debt if you default. With the SBA’s backing, lenders can also offer you lower interest rates.
It takes a lot of effort to start a business primarily because of capital. With these alternative options, you can at least ease the burden of financing your startup and focus on planning for your business’ growth.