When small business owners need financing, they typically think of traditional small business loans from the bank, but that’s far from the only option. There are plenty of small business loan alternatives out there.
7 Alternatives to Small Business Loans
Credit Card Financing
As an alternative to small business loans, credit card financing has some risks—specifically, the danger of getting in over your head if you can’t make the payments. Plan wisely, however, and credit card financing offers some useful benefits. It’s generally pretty easy to get a credit card. You can access the money you need right away and roll over your charges from month to month. Depending on the card you choose, you may even be able to earn cash back or other rewards for your business when using the card.
Home Equity Loan/Line of Credit
If you have equity in your home, you may be able to use a home equity loan or home equity line of credit (HELOC) as a small business loan alternative. If you get a HELOC, you won’t incur interest or owe any payments until you actually draw on the line of credit—which you can do whenever you need to. As you pay down the money you withdrew, it becomes available to borrow again. Just be sure you are able to pay the money back, or you could put your home at risk.
One of the smartest small business loan alternatives for business owners who need to purchase business equipment or vehicles is to choose leasing instead of buying. When you lease, you don’t have to put down a big chunk of cash to get the equipment you need, which helps your cash flow. You also get current equipment with the latest features and no worry about it becoming obsolete. Consider working with the leasing arm of the equipment or vehicle manufacturer—they have a vested interest in making the deal.
As its name implies, peer-to-peer (P2P) lending means borrowing from other individuals. This type of alternative financing is typically done through an online marketplace where borrowers and lenders can find each other. Once you apply and get approval to be listed on the site, you’ll need to make a persuasive case for why you need financing. Use a peer-to-peer lending site that focuses on business loans rather than personal loans; these sites have higher loan limits.
Similar to P2P lending, crowdfunding involves promoting your business on a crowdfunding website to try to convince individuals to contribute to your company. (Unlike P2P lending, in crowdfunding the money that individuals put up is a donation or gift to the business, not a loan.) This alternative to small business loans works well for businesses with new product launches, innovative consumer technology or anything with the potential to generate lots of buzz.
One of the easiest small business loan alternatives is invoice financing, which uses your outstanding invoices to generate money for your business. Instead of waiting for your clients and customers to pay the invoices, you are advanced the full amount of your invoices from the invoice financing company. The application process is simple, and you get the money fast—for example, with Fundbox invoice financing, you can get the money in your account in as little as one business day.
Purchase Order Financing
Purchase order financing uses an outstanding order to get a loan for your business. If you have a firm purchase order in hand, a purchase order lender advances you money to cover the cost of the products or services the customer has ordered. This works best if it’s a large, reputable customer, a substantial order, and you’ve written the sales agreement in such a way that there’s little chance the customer will cancel the sale.
There are lots of advantages of alternative financing. Whatever type of financing you choose, make sure you understand the terms of the agreement, can pay the money back, and have a plan for how you will use the proceeds to make your business more successful.