Startup businesses across multiple industries continue to look for the best financial solution to fund their small business costs. As more and more entrepreneurs look for smart solutions to fund their startup businesses, most face the same roadblock. What lending options are available for small businesses looking for microloans?
Large financial institutions are less than willing to lend microloans to startup businesses. Microloans are lending requests that are less than $100,000. It’s difficult to find someone to fund these lower sum business loans because they are considered to have high transaction costs with low profitability. But, most startups and some small businesses need these loans to get on their feet and get their business moving forward. So, what options so these businesses have that are the right solution to meet their needs and give them the best ROI?
Community Bank Loans
One of the biggest issues startup entrepreneurs face is that they turn to large banks to secure their loans. The truth is that larger financial institutions don’t want to get involved with the lower scale lending that most small businesses require. Community bank loans are the solution to this common problem. In fact, they currently represent 50% of all outstanding small business loans and are one of the top providers of microloans, according to the Federal Reserve System.
Since community banks have a closer focus on local businesses, they tend to partake in relationship-based lending. This means that they will take more time to work with your startup business and give you advice on how to better qualify for loan approval. Community banks can help you establish your creditworthiness and will even look beyond the credit score to truly assess your business potential. While large financial institutions focus solely on your credit scores and the length of credit history you have, community banks won’t automatically disqualify you for these factors.
Small Business Line of Credit
The small business line of credit has become a popular way to fund startup business costs. While they are easier to lock in and get approval for, they hold additional benefits for startups and small businesses. The revolving credit with small business credit cards gives you the change to build your credit score and history and even earn money back and rebates.
Using small business line of credit over time can greatly improve your business’ credit score. Once your startup costs are paid off, many businesses choose to continue to use the line of credit for purchases to build their company’s credit profile and take advantage of the perks of their credit card. While late payments and outstanding balances can actually your credit score, paying these bills on time and paying the credit line off with each billing cycle can move your business to new heights when it comes to your credit profile.
As more and more financial institutions come onto the market, online lending is becoming a popular option for business loans. Startup businesses can take advantage of online lending platforms like Lending Club, Prosper, and OnDeck. Like community banks, online lenders look beyond the credit score and can help you get approval even if you don’t have the background you need to do so.
While online lending is a great option if you are having a hard time locking in a startup business loan, it’s important to note that many online lending businesses do not have regulatory practices strongly enforced. So, you should proceed with caution and read all the fine print thoroughly before you sign up for this option. Make sure you fully understand the terms of your loan and don’t sign anything you don’t understand. Avoid companies that don’t have a reputation established, and definitely shop around!
Exploring Alternative Solutions
In addition to these great financing options, there are alternative solutions to business loans. Many startups are turning to Crowdfunding to get the money they need to start their business. Crowdfunding is a great option for businesses looking to develop a new product or launch a new service. Through crowdfunding, the general public donates money to the creation of a new product or service. The donation comes with some type of reward once the company secures all the funding they need to launch their business.
Companies like Kickstarter have helped thousands of startups meet their funding requirements and get their business up and running. Through social media sharing and the right ad campaign, businesses like Kickstarter have raised over $2 billion for startup projects.
So, there’s no way around the fact that startups and small businesses will continue to face hard times when it comes to securing microloans. But, there are other options you can pursue to get the funding you need to get your business off the ground. Community banks, small business credit cards, and online lending can give you the money you need with some additional perks as well. And, when all else fails, crowdfunding has proven to be a successful alternative for businesses in many industries.