If your business is eligible, banks and credit unions will offer the best business financing. This disparity is growing and only a small percentage of small-business loans are approved.
According to the Federal Reserve’s 2022 Small-Business Credit Survey, approval rates by both large and small banks decreased from 2019 to 2021. Small-business owners who received some financing in the past year saw a decrease of 8% among applicants from small banks compared to 2019. Large banks approved 15% less applicants during the same period.
Many business owners need capital to pay their daily expenses, especially in light of economic challenges like rising inflation and supply chain disruptions.
You might consider other funding options if you are unable to get a traditional bank loan. These are just three options.
1. Online lenders
Although the loan cost is higher, online lenders offer many types of small-business loans.
While banks and community financial institutions might feel the effects of economic changes, such as the Federal Reserve raising interest rates, alternative lenders often fill the gap in the market. Josh Palkki is chief credit officer at Founders First Capital Partners, a San Diego-based small business lender that provides revenue-based financing and advisory services.
Palki states that alternative lenders are less likely than bank lenders to feel the same pressure or shift their internal processes and methods of evaluating business loan offers. Because they charge higher interest rates than traditional lenders, these lenders are less risk-averse.
Online business lenders often offer quick approvals and can even provide funding within 24 hours. You should consider the following factors when choosing the right lender: type of loan offered, eligibility criteria and funding speed.
2. Business grants
Small-business grants are a great option for financing your business without having to repay it. You can get business grants from the federal, state, and local governments as well as private companies.
Grants.gov is a website that allows you to search for thousands of federal grants for small businesses. It is managed by the Department of Health and Human Services. You will need to verify your eligibility before applying for these grants.
Local economic development agencies and corporations can also be responsible for encouraging company formation and job creation, according to Hal Shelton, a mentor for small-business owners who serves the Washington, D.C. SCORE, a non-profit that provides free resources to small business owners.
These local organizations often offer loans and grants for businesses. New York’s Empire State Development Agency offers many funding options for small businesses. This includes the Global NY Grant Fund program which grants up to $25,000 to New York-based companies looking to increase or start their global exports.
Small-business grants can be a great option if they are available. However, it can be difficult to apply and can take a lot of time. You might want to look at other financing options if you require faster funding.
3. Raise equity
You might consider raising equity if you have a loyal customer base, and you are able to market your company. An equity crowdfunding platform allows you to raise capital online. Investors give capital in return for your equity ownership.
Charles Alexander and his co-founders couldn’t get a loan from a bank for The Black Bread Company. They decided that equity crowdfunding was the best option. It tied them to their community roots.
Alexander says that the goal was to have the lowest share buy-in. Alexander says they wanted to make it easy for people to invest in companies they are familiar with. This would allow them to participate in the growth of the company and at a pace where nearly anyone could join the journey.
However, equity crowdfunding is not a quick and easy way to finance your business.
Alexander says that it can be a lengthy process to give up shares of your company. Alexander notes that business owners must ensure they comply with the U.S. Securities and Exchange Commission regulations and guidelines.
Many equity crowdfunding platforms, such as Fundable, StartEngine, and Netcapital offer support services that can help business owners navigate the fundraising process. StartEngine provides small business owners with a dedicated fundraising strategist to help them through their campaigns. This includes both advertising and marketing strategies.
Alexander says it can be difficult to prepare an equity crowdfunding campaign. It was amazing once it was launched. In 30 days, we raised $660,000.
Equity crowdfunding is not for everyone. You must put in the effort and time to promote your business. And, of course, you must be open to giving up some ownership.