Big banks saying no? These 10 financing options could mean yes to your small business

When you own a small biz, asking a bank for a loan can be a tough sell. While it’s gotten easier for small businesses to borrow, competition can still be fierce, and if you don’t have good business credit, you’ll be out of the running. Luckily, the big banks aren’t the only game in town. Whether you need some cash to turn your side hustle into a full-time gig, or you want to buy equipment, make your business bigger or get through a slump, you’ve got options.

Why do businesses borrow?

73% of small firms used financing in the last 12 months, and according to the SBA, small businesses borrow for 4 key reasons:

  1. Getting started
  2. Buying inventory
  3. Expanding
  4. Making the biz stronger

1. DIY financing

Ideal fit: First-time business owners with lower costs; poor credit scores

Using your savings or borrowing against your equity is a popular choice. (And don’t worry – so is hitting up the Bank of Mom and Dad.) It’s relatively easy, and it leaves you with 100% control over your company and its profits – apart from family, there are no lenders, investors or shareholders to worry about.

There are, of course, some downsides to this option. Are those savings you’re tapping meant for retirement? Your golden years could take a hit. Borrowing against your home? If things go south, you could be saying sayonara to your personal credit score – and your house. And can you face Aunt Suzie if her investment disappears? It’s something to consider when pulling family and friends into your plan.

And finally, the DIY route can really limit how fast your business can grow – you’ll likely need some additional sources of cash to succeed long-term.

Pros: $ is easy to access; you stay in control of your biz

Cons: Risks to personal credit, relationships (sorry, Aunt Suzie) and limits on biz growth

2. Tapping into your 401K

Ideal fit: Business owners with retirement savings

Got a nice little nest egg sitting in your retirement account? The feds will let you borrow from it to finance your small biz – penalty-free! Yep. It’s a great option if you’ve got some significant savings and the type of business that qualifies for the program (you have to be selling or exchanging a product or service – no hobby businesses).

However, when tax shelters like your 401K are involved, you know they won’t make it easy. So unless you’re a tax whiz who’s ready to jump down a legal rabbit hole, you’ll need a tax attorney or Certified Public Accountant (CPA) to set up a C Corporation and create a plan for your retirement assets and the salary you’ll draw from the corporation (too much or too little, and the IRS won’t like it.)

And, of course, if your venture doesn’t succeed, you won’t just lose your business, but your nest egg could fly away, too.

Pros: You stay in control; access serious cash; no tax penalty

Cons: Super complicated; slow, risk of losing retirement $

3. Credit cards (business and personal)

Ideal fit: Any small biz looking for smaller amounts for short periods of time

According to the United States Small Business Administration (SBA), 7% of all startup capital comes from credit cards and it’s a top source of short-term capital for small businesses.

Used responsibly, using cards can be great for small purchases, revolving needs, or getting out of the occasional jam. Credit cards are flexible: you get money when you need it, and you don’t have to justify your spending to a lender or investor. Some cards offer bonus interest-free days, which can help your cash flow. And if you’ve got one that gives you cash back, you can use those rewards for business purchases.

Pay off your cards off fast and this can really work. But fall behind on payments and your credit will take a hit. And if you only pay the minimum, you’ll end up forking over a huge amount in interest.

Pros: Easy access to cash; flexible; can help with cash flow; helps establish credit

Cons: High interest rates; debt can add up fast

4. Big banks

Ideal fit: Established businesses looking for larger loans

Heading to the bank that has your checking account and your mortgage is a pretty common choice, especially for larger loans. But expect to jump through a whole series of hoops – you’ll need to prove you have solid business credit, provide business plans, and you may not be able to use the money for whatever you want. And this is definitely not the speediest way to get cash – you’ll probably wait weeks before the money’s in your hands.

Other ways banks can be harder for small biz: repayment won’t be flexible (they aren’t terribly understanding if you’re in your slow season). And while they’re a good for larger loans, smaller amount are harder to get.

Pros: Access to larger amounts of $

Cons: Slow; lots of hoops to jump through; not flexible; have to have business credit

5. Credit unions

Ideal fit: Established businesses looking for smaller loans

Going to a credit union is kind of like going to a bank – you’ll still need good credit and a business plan to convince them to hand over their money. But credit unions are smaller than banks, so they can be a good bet if you’re looking for a smaller amount – or a faster approval (they tend to process applications as soon as they get them, while banks do approvals weekly or monthly).

Plus, they often have lower interest rates: because they reinvest profits back into the credit union, borrowers  can save on interest. And since they’re non-profits, they don’t pay taxes – another savings that gets passed on.

Pros: Great for smaller amounts; lower interest rates

Cons: Process is slow; lots of requirements

6. SBA loan

Ideal fit: Businesses that have been turned down for a regular loan

If a bank has said no, the SBA may be able to help. They’ll guarantee your loan (so if you can’t pay it back, the government takes the hit). Check out their funding programs – you can access anything from microfinancing to long-term loans and lines of credit up to $5 million.

Of course, because it involves taxpayer dollars, the application is a doozy – be prepared to put in some serious time there. And not everyone will qualify: you have to have good or excellent credit with no defaults on government loans (including student loans).

Pros: Will finance businesses banks won’t; amounts up to $5M

Cons: Sloooow and seriously complicated

7. Crowdfunding

Ideal fit: Businesses with consumer-friendly products looking for a small influx of cash

Whether it’s Kickstarter, Indiegogo or GoFundMe, crowdfunding is a low-risk way of infusing your business with cash. Set a goal, then get people to pledge dollars in exchange for a gift, a discount or a perk. The folks pledging aren’t investors, so they don’t expect a return or a share in the business. Many just want to see a cool product or interesting business succeed.

Crowdfunding is a great way to access smaller amounts of capital for one-off ideas like a new product – it’s great for pre-selling products to raise funds for manufacturing. Plus it’s a powerful marketing tool that can open the door to future financing and partnerships.

The biggest challenge? You don’t just have to convince one investor that your idea’s good; you have to convince hundreds.

Pros: No-risk; great for smaller amounts of cash; good marketing tool

Cons: Hard to raise large amounts,;have to convince lots of people

8. Peer-to-peer lending

Ideal fit: Any small business, including those with poor credit

Want to go direct to investors? Funding Circle, Wefunder and Crowdcube connect borrowers right to the money people – there’s no middle man. You apply online and decisions are typically quick and interest rates reasonable.

P2P is a fast-growing sector: PwC estimates it could reach $150B by 2025. The platforms all cater to different niches and have varied criteria, rates, lending amounts and loan periods. For example, Funding Circle focuses on small business loans with terms up to five years, with an investor base that includes everyone from individual retail investors to big banks.

Pros: More accessible than banks; can apply with poor credit

Cons: Very untraditional; not available everywhere

9. Angel investors and venture capital firms

Ideal fit: Any growth business looking for a major investment

This is where a high-net-worth person (angel) or firm (VC) gives you money in exchange for an ownership share (think Shark Tank). You’ll need to hand over market assessments, competitive analyses, marketing and sales plans and corporate governance documents to build a strong case as to why they should invest in your business.

While it’s great to get the massive influx of cash this kind of financing can bring, you’ll be giving up a share of control and equity; when an angel or VC group is involved, you won’t be the only one calling the shots anymore.

In the last few years, angels and VC firms have shifted their focus to later-stage investment – looking at companies in their expansion phase as opposed to startups. However, online platforms like Crowdfunder or SeedInvest are popularizing “equity crowdfunding,” making it easier for smaller players to connect with the money men and women.

Pros: Large $ amounts

Cons: Lots of hoops; loss of control/equity; hard for newer businesses

10. Alternative lenders

Ideal fit: Any small/medium business that’s been around for 2+ years

Online lenders tend to be about speed and flexibility. In general, applying is fast, there’s minimal paperwork, approvals are pretty quick, and the money is in your hands in days. You don’t have a bunch of hoops to jump through, and you can usually use the cash for whatever you need.

Not all online lenders are created equal, though (no surprise) so it pays to do some digging before you commit. Check out their websites, read reviews and customer stories, and get a good sense of how they treat their customers. If you can’t figure out immediately how their process works or what their rates are, walk away. Look for lenders who are super-clear up front, and make the process as easy as possible. Really, if they don’t put the customer first, they should be last on your list.

You want a company that’s honest and transparent – no upfront costs, hidden fees, surprises or unreasonable rates or repayment schedules, just a clear indication of how to get approved and how to pay the money back. Period. And if you find a lender that rewards you for loyalty – that one is a keeper. Those who know the value of a strong relationship will offer better rates or other perks to borrowers with good repayment history. And really, why should it be any different? The loan should be about your needs, not theirs.

BFS Capital is an example of this kind of lender – we offer loans from $5,000 to $500,000, with funds approved and in your account in two business days. We figure out how much you can borrow (and how you’ll repay) based on your monthly revenue, so your loan fits your needs, not the other way around. There are no upfront or hidden fees, ever – just an easy-to-understand loan that’s designed to move your business forward.

Pros: No hoops or hurdles; get cash fast; flexible options

Cons: Must be in business 2+ years

What’s best for your business?

Yeah, we get it. Talking about financing your business can be pretty yawn-inducing. But if you look at it as fuel for your amazing idea/next step/lifelong dream, then it gets pretty exciting. You just have to find the source that’s right for you.

See how much you could qualify for