One of the biggest headaches for small businesses is adequate access to capital. They have to ensure that they cash on hand to meet day to day expenses, purchase raw materials, maintain inventory, and expand their business. They also need to ensure that they have access to capital in case of a business emergency. It’s a lot to do, but fortunately, alternative small business loans are making this easier than ever. Using these loans can help improve your business.
Need for Business Loans
Access to capital for business cash flow, low business cycles, business equipment, and business property is imperative. Lack of adequate capital can send an otherwise stable company into a tailspin. This is why business leaders understand that access to capital is imperative to business growth.
Businesses can suffer from a capital shortage from time to time and often times it’s not because of any management issue. Imagine a company that is used to smaller order receives a very large order and will only receive payment 30 days after the order is shipped? They need extra capital to buy materials, produce the product, and deliver it. They can either refuse the order because they don’t have the capital or they can take out a business loan so that they can take the order and complete it.
All too often a small business has a slow paying client who always pays but pays late. Meanwhile, they have a vendor that is refusing to ship raw material until they are paid. Sometimes these type of situations can come on suddenly and money is needed yesterday to resolve it.
Other times, companies might need to replace a machine that has failed. While some small businesses do keep a fund for business equipment replacement, many do not. If the machine is integral to production and the business doesn’t have access to the capital to replace the broken machine, the business can fail through lost orders and failed shipments.
Traditional Business Loans
Traditional business loans are used by larger businesses to fund their operations. Often times, they will get a credit line from a bank and draw from that credit line when they require capital funding. This keeps them from needing to go back to the bank loan officer every time they need to get access to capital.
Small businesses often don’t have access to credit lines they can access at a moment’s notice. They need to make a bank application for loans and present many documents to show that they are solvent and that their business is sound. Even then, the business often doesn’t get what they need. In fact, small businesses are often denied loans.
The US Small Business Administration has several loan guarantee programs that help small businesses get capital to start up their operations or fund capital operations. Most of their loan programs are quite slow to provide funding. There are express loan applications but these have higher loan requirements, including a high credit score and more documentation. Moreover, these SBA loan guarantee programs only cover a portion of the loan so they still need approval from a bank loan officer.
How Alternative Small Business Loans Are Different
In the last several years, more alternative business loan opportunities have become available as new companies have challenged the hold banks have on business funding. By offering an alternative route, more businesses have access to the capital that they need to expand their business, meet short-term cash flow challenges, and take care of business emergencies.
These loans sometimes often with higher interest rates than banks, but for many businesses this higher interest is a trade off that they are willing to take when the alternative is turning down an order or not making a needed vendor payment. They provide solid funding when funding isn’t otherwise available.
Types of Alternative Small Business Loans
Accounts receivable financing, also called factoring, is one of the oldest kind of business financing. Basically, you borrow on your accounts receivable. You turn over your AR accounts to the funding company who will collect on the invoices. You are paid a percentage of the amount of the invoices that varies based on the age of the invoices. You lose a certain percentage of the invoices for access to cash right now.
Short term business loans are quickly becoming an even more popular form of business financing. There has been a rise in the number of companies that offer these short term loans because of the growth in technological tools. It’s easy for the loan company to verify that the applicant has been in business a certain length of time and even verify their revenue and expenses through the plethora of cloud-based accounting tools that many businesses use.
Applying for Alternative Small Business Loans
It’s never been easier to apply for alternative small business loans and get access to the funding your business needs to grow. The easiest way to find a loan provider that works with your business and make the application. There are many different companies out there like Kabbage, Blue Sky, OnDeck, StreetShares, BlueVine, Lending Club, and many others.
They all have similar types of requirements, but the specific numbers differ. Basically, you need to have been in business for at least 6 months to a year, meet minimum revenue requirements of between $50,000 and $100,000 and have a minimum credit score from between 500 and 600 on up. Annual revenue of $50,000 and 6 month in business is usually a minimum that will enable your business to get funding.
With access to the capital you have from using your alternative small business loan, you can build your business and get through a rough patch. It can be the way forward for your business.