Alternative Lending Sources When the Bank Says “No”
When traditional banks turn down your business loan application, where can you turn? We asked five top executives and financial experts, from Presidents to a Financial Spokesperson, to share their best alternative lending sources. From considering online lending platforms to exploring microloans, crowdfunding, or CDFIs, here are the top five alternatives they recommend.
- Consider Online Lending Platforms
- Opt for Revenue-Based Financing
- Explore Peer-to-Peer Lending
- Seek Loans from High Net Worth Individuals
- Try Microloans, Crowdfunding, or CDFIs
Consider Online Lending Platforms
One alternative lending source when the bank says “no” to a business loan is online lending. Online lenders are non-bank entities that offer loans to small businesses through digital platforms. They typically have less stringent eligibility criteria, faster approval processes, and more flexible repayment options than traditional banks.
Some examples of online lenders are:
- Kabbage: Offers lines of credit up to $250,000 with terms of 6, 12, or 18 months. Requires a minimum credit score of 560 and one year in business.
- OnDeck: Offers term loans up to $250,000 and lines of credit up to $100,000 with terms of 3 to 36 months. Requires a minimum credit score of 600 and one year in business.
- Funding Circle: Offers term loans up to $500,000 with terms of 6 months to 5 years. Requires a minimum credit score of 660 and two years in business.
Online lending can be a good option for small businesses, but it may also come with higher interest rates and risks than traditional bank loans.
Opt for Revenue-Based Financing
An ideal alternative lending source when traditional banks reject your business loan can be revenue-based financing. This model caters especially well to businesses like e-commerce and SaaS companies, which typically have predictable cash flows from customer contracts.
Companies such as Pipe and Capchase are leading players in this arena. The essence of revenue-based financing is that companies remit a certain proportion of incoming payments from customers to their financing partners, meaning, you pay back the borrowed sum only when you have cash inflows.
This approach notably reduces the risk associated with debt-based financing, especially in challenging business climates, and alleviates the pressure of fixed cash outflows that traditional bank loans necessitate.
Explore Peer-to-Peer Lending
When banks say “no” to a business loan, an alternative lending source you can consider is a peer-to-peer (P2P) lending platform. P2P lending connects borrowers directly with individual investors willing to lend money. It’s like borrowing from a community rather than a traditional bank.
These platforms operate online, making the borrowing process more accessible and efficient. They often have less stringent eligibility requirements and are more flexible with loan amounts and repayment terms.
By cutting out the middleman, P2P lending can offer an alternative solution for businesses seeking funding when faced with rejection from traditional banks. It’s worth exploring these platforms so you can find the financial support your business needs.
Seek Loans from High Net Worth Individuals
Just like any bank, high-net-worth individuals can provide loans, usually referred to as private notes. Banks have rigid underwriting standards, and it’s possible the borrower gets tripped up in one or two areas that do not concern a private lender.
Anyone who goes this route will want to find a way to connect with borrowers that have an incentive to rate their creditworthiness better than the bank. Typical examples include family connections, close friends, or people from within the industry who understand the pros of the business much better.
Try Microloans, Crowdfunding, or CDFIs as Alternatives
As a financial expert, I suggest three alternatives. First, Microloan programs, such as those offered by the Small Business Administration (SBA), provide smaller loan amounts to entrepreneurs, typically up to $50,000. These loans are customized to help small businesses, startups, and disadvantaged entrepreneurs.
Furthermore, crowdfunding platforms will allow you to raise funds by soliciting small contributions from many individuals. This can be done through donation-based crowdfunding (e.g., Kickstarter, Indiegogo) or investment-based crowdfunding (e.g., equity crowdfunding platforms like SeedInvest and StartEngine).
Last but not least, community development financial institutions (CDFIs) are specialized lenders that focus on providing financial assistance to underserved communities and businesses. They often have more flexible lending criteria and may be more willing to work with borrowers denied by traditional banks.
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