The business lending landscape has changed dramatically in the last few years, making it difficult for some business owners who still rely on the classic model of marching down to the local bank or credit union and filling out a few application forms and disclosures. The global financial crisis has been one of the major forces of change, along with the advent of Internet technologies, globalization, and the overall transformation of modern business.
Many American business owners no longer enjoy the widespread and unbridled prosperity that seemed to be the norm decades ago. As a result of this decline in profitability amidst a highly competitive business climate, credit and underwriting guidelines are now stricter than ever. This could be a dispiriting situation for some business owners, but the good news is that there are a few alternative ways to obtain business financing.
Here are the top five ways to secure a loan for your business:
1 – The Traditional Approach
This approach is still one of the preferred ways for American business owners and budding entrepreneurs to obtain financing. It is a moderately bureaucratic affair; consisting of application forms, credit checks, financial statements, business planning, and other aspects of due diligence. These loans often require that applicants have a considerable amount of experience in their chosen field or line of business. Cosigners and collateral are typical requirements.
Traditional business lending still makes sense because it is a respectable part of the economic establishment. The credit crunch has unfairly taken some of its sheen off, but it is still a very viable approach to commercial financing, one that all business owners should attempt at least once. Given the tight credit and lending requirements these days, getting approved for a traditional business loan can be a huge morale booster.
2 – The Small Business Administration (SBA)
SBA lending and the traditional approach have been existing in harmony since the mid-1950s, but since the passing of the American Recovery and Reinvestment Act of 2009, SBA loans are pretty much the only way for startups and small to mid-sized enterprises to get old-fashioned loans. While the SBA does not actually fund the loan, it guarantees up to 90 percent of it, thus making it more attractive for banks to lend. SBA loan approvals have been sky-rocketing in the last couple of years, and the pace is expected to continue.
Getting SBA loan approvals often calls for even more transparency and due diligence than the traditional approach, but the government agency is ready to help with counseling and guidance that can be found right on their website: www.sba.gov
3 – Financing Based on Accounts Receivable
Business owners who have kept good records of their account receivables and invoices can ask business loan brokers for asset-based alternative financing methods. Short-term loans can be obtained based on the amounts of outstanding invoices and the clients’ ability to repay. Future gross receipts can also be calculated from credit and debit card records kept by merchant processors, thereby giving a loan underwriter an idea of how much of an advanced loan can be given to a business that agrees to repay by drawing from future proceeds.
4 – Partnerships and Venture Capital
By nature, entrepreneurs tend to shun partnerships and angel investors due to the potential amount of control they could cede in exchange for funding. The horror stories of corporate raiders and greedy venture capitalists are mostly spectacular and overblown. Partnerships and capital investment agreements are always negotiable; no business owner should ever feel pressured into signing oppressive contracts for money. When seeking venture capital, business owners are strongly advised to check that their potential partners are reputable by looking at lists like the Entrepreneur 100: www.entrepreneur.com/vc100/
5 – Creative Lending
Grassroots financing, peer-to-peer lending and crowd funding are Internet-powered community financing opportunities for progressive business owners looking for creative funding. Internet-savvy borrowers are advised that these alternative financing methods are based on the wisdom of crowds and subject to the court of public opinion. Economic analysts are observing sites such as prosper.com and kickstarter.com to understand how participatory lending is shaping the future of business finance.
There is one more important factor to remember when securing a loan for your business: By going with a traditional approach, the business owner’s personal credit record is usually queried, something that can result in lower credit scores. A business loan application rejected by an established lending institution is likely to influence future decisions of traditional lenders. By choosing alternative methods of financing, a business owner is less likely to put his personal credit history on the line.
Author Sheila Barnett writes on personal finance and budgeting for www.financialcalculator.org, a site with helpful details and financial tools such as an investment calculator, a millionaire calculator, and even a brand vs. generic calculator!
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