How to Find the Right Financing for Your Business

For the millions of business owners nationwide, securing capital to grow their businesses has always posed a difficult challenge. The current uncertain market conditions have only served to intensify this challenge.

While banks have usually been the first stop for business owners, this route has proved challenging for businesses owners who are looking for $30,000 or $40,000 for their business. This is because historically, banks have lacked an efficient and cost effective infrastructure to underwrite and evaluate small businesses.

As a result, banks have relied on the personal credit score of the business owner to judge the creditworthiness of the business itself. While the personal credit score is an easily accessible piece of information, it does not provide an accurate reflection of the health of the businesses. And because banks usually have a minimum credit score to consider working with a business (roughly 680 to 720 depending on the institution) many healthy businesses are shut out of their lending process. 

So, where should a business owner seek financing should they not fall within traditional banking parameters? The good news is that technology is paving the way to a whole new realm of powerful financing options.

Below are some different financing avenues available based on specific qualifications and needs.

Matching services

These services allow you to register your business and have your profile and lending request shown to hundreds of lenders on their system who may be interested in funding your request.  These matching sites are efficient and allow borrowers to reach a significant number of lenders quickly; however, most of the lenders on the system are going to be traditional banks.

Examples: Lendio.com, Biz2Credit.com

Short term business loans

Technology has paved the way for new financing that provides fast access to capital for small businesses. These loans can be funded in as fast as 48 hours, are typically for amounts less than $150,000 and have terms ranging from three to 18 months. The benefits of these loans are threefold:

• They are based on business performance (meaning actual cash flow) and not just personal credit.
• They require information that is readily available from electronic records (bank account, credit card transactions, etc.)
• The term is designed for businesses to spread out the payment, but also have it paid down before capital is needed to implement any opportunities that may arise. (You don’t want debt stacking up on your business.)

Example: OnDeckCapital.com

Factoring

Factoring involves selling receivables (invoices) to a third party at a discount. For businesses with large amounts of receivables, factoring can be an effective solution to solve working capital needs. While this type of financing is not new, technology is allowing these services to reduce costs and make the process more efficient for businesses. 

Example: ReceivablesExchange.com

Social lending

Social lending sites connect borrowers online with individuals or groups of people willing to lend at an agreed upon rate, without using a bank as an intermediary. This resource provides a forum for business owners to go online and apply for loans ranging from $1,000 to $35,000. Individuals or interested groups can then view your credit profile, learn how you plan to use the money, and if they are interested, group together with others to fund your request. In other words, a $10,000 loan for your business could actually be funded by 100 individuals putting up $100 each.

Examples: LendingClub.com, Prosper.com

If you’re seeking financing to grow your small business, it’s important to understand that there are great financing options beyond your local bank. Advancements in technology have paved the way for new and efficient vehicles for small business owners to access capital. When a traditional bank isn’t a perfect fit, remember to investigate the options outlined above in order to help your business thrive.