Funding a small business is never easy. For many small businesses, getting a loan from a bank is near impossible. If you don't have a rich uncle or a ton of cash stashed somewhere, alternative forms of financing may be the answer.
Gene Marks, a small business columnist and speaker, and accounting software provider Xero recently held a webinar discussing the current small-business lending environment and options small businesses have for financing. Small business financing experts Victoria Treyger, head of sales and marketing of the small business financing company Kabbage, and Annie M. Hudspeth, lender relations specialist at the Small Business Administration (SBA) also shared their advice for small business owners. Here are the highlights from the webinar and how alternative forms of financing can help your small business.
1. What alternative forms of financing are available to small businesses?
There are three main alternative forms of financing available to small businesses: crowdfunding, microloans and the SBA. Crowdfunding involves raising funds from large numbers of people. Funds can be considered as donations, loans or investments. Typically, crowdfunding works by "backers" contributing a fixed amount of cash to the business, idea or project, for which they may receive a reward. With crowdfunding, however, this reward typically doesn't include equity or ownership of the company.
Microloans (or microfinancing) consist of small loans given to entrepreneurs who have little to no collateral. Microloans sometimes have restrictions on what you can spend the money on, but they typically cover operation costs and working capital, or things like equipment, furniture and supplies. One example of a small business microfinancer is Kabbage, which offers microloans of $2,000 to $150,000.
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The SBA also has its own small business microloan program. Instead of lending directly to businesses, however, the SBA distributes the funds to nonprofit community-based organizations, who then decide which businesses get the loans. Other SBA loan programs include general small business loans – known as the 7(a) Loan Program – real estate and equipment loans, and disaster loans.
2. How can small businesses prepare for crowdfunding and microfinancing?
Applying for financing requires much more than just filling up an application. To increase chances of getting financing, small business owners should do their homework and have a strategy.
To help you prepare your business for financing success, the panel suggests:
- Knowing how much you need to borrow up front.
- Having a business plan with financial projections.
- Doing your market research and knowing conditions of your industry.
- Having a well-crafted resume and knowing your credit score.
- Meeting with a small business resource and attend training through the SBA.
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Small business owners should also establish a strong online presence and pay attention to how they look online — because lenders will, too. Online review sites such as Yelp, Angie's List and Trip Advisor help paint a clear picture of your operations and serve as an overall indicator of your business health. Social connections and customer relationships on social media can also play a role in a lender's decision to offer financing.
3. Why is it difficult for small businesses to get loans from banks?
Access to capital is difficult for small business for several reasons. It's not that banks are against lending to small businesses, however. Banks want to lend to small businesses, but financial institutions have an outdated, labor-intensive lending process and regulations that are by far unfavorable to local shops and small organizations. The difficulty of accessing capital is exacerbated because many small businesses applying for loans are new businesses or startups. Instead, banks typically want to see at least a five-year profile of a healthy business (for instance, five years of tax data) before extending an offer.