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Bank Business Finance Pitfalls and Alternatives

Every business needs money to get started. Even if you are thinking of something as small as making stickers, you’ll need to invest in good equipment and materials. Unfortunately, this is far beyond the means of many people with great ideas. Therefore, financing is an essential element for any business.

The good news is that today you have many types of financing available to help power up your business plan. The bad news, however, is that obtaining that money will be extremely difficult. Your chances with traditional finance institutions, like banks, are almost nonexistent, so finding alternatives is a must.

Small Business Financing: Where Does It Come From?

The most common sources of funding for businesses today are:

  • Personal investment
  • Bank loans
  • Small business loans
  • Personal loans
  • Credit
  • Credit cards
  • Crowdfunding

According to data from the SBA, three-quarters of small businesses get financing from business loans, business credit cards, or lines of credit account. This might seem like a great thing if you don’t take into account the fact that the rate of approval for big banks is about 23%. Other types of lenders have a higher approval rating for small businesses. But that comes at a cost of bigger interest rates and, sometimes, restrictive terms.

Of course, some small business owners start with their own capital or borrow money from family. However, the number of people who can afford it is much smaller than the number of those with ideas worth realizing.

Crowdfunding, while good, is a very limited option as very few campaigns reach their goal. Also, it’s a type of financing you can’t rely on 100% due to its unpredictability.

Personal loans are the worst type of financing because of their extremely high interest rates. Your chances of success with this much fast-accumulating debt are nearly non-existent.

But other options definitely deserve a closer look.

The Impact of Credit Score on Your Chances of Bank Business Financing

Bank financing and specialized business loans backed by the government are the best places to get funds. They have reasonably low interest rates and terms geared towards businesses. However, those are the loans that are the hardest to get.

The problem is your credit rating. To be approved for this type of financing, it has to be very high. However, the majority of people who need that financing have poor credit rating either because they have only started or because they had some trouble in the past.

And with that one simple thing top financing options will be completely closed to you.

Are Credit Cards a Better Option for Business Financing?

Unlike bank financing, credit cards are very easy to get and they provide you with funds nearly instantly. However, these cards always have high interest rates and strict repayment terms. Also, considering that they are so easy to get and use, they tend to be “addictive”. Quite often people simply won’t realize how much debt they are accumulating when using credit cards on a scale for business.

The result is that you’ll be working to pay off debt and might not be able to do even that, let alone make any profit. Credit cards are a good stopgap option when you need some cash. But they should only be used short-term and paid off as soon as possible.

Top 3 Business Financing Alternatives Worth Attention

1.     Small Business Loan Providers

If you want to get some better loans that won’t bury you under a mountain of debt, you should look into the up and coming alternative to business finance. Unsecured loans from independent lenders that are designed specifically for businesses will be the best choice.

Those loans might not be on par with offers from big banks. However, they are much easier to obtain, even if you have nothing to secure the loan with. Usually, these business loans have the most basic approval terms. You might not even need to provide a business plan or report how exactly you will use the money.

Interest rates will be higher than average, but they aren’t as high as with personal and payday loans. Also, there are many small business loan options available, and they are extremely versatile. This means everyone should be able to find financing that will suit their business best.

But remember that not all lenders are trustworthy in this industry. It’s imperative that you research the loan provider and only work with certified and legitimate finance businesses.

2.     Invoice Factoring

Invoice factoring is a financing option for businesses that have a few unpaid invoices. They will be able to sell those to a third-party company for a fraction of the value. Because of that, this isn’t the best possible deal, but it can be a good solution for some companies.

Invoice factoring is a good solution for you if you have accumulated invoices for a hefty sum but your terms say that they can be paid within some 30 or even more days. If you need cash right now, this financing will be a perfect option. You will lose a portion of the money, but you’ll be able to boost your cashflow immediately. For a small business, it’s often a matter of survival.

3.     USA Cash Advance

USA Cash Advance is getting very popular as a financing option for businesses today despite the fact that, in essence, it’s a payday loan. It offers you money fast and your credit rating doesn’t matter at all. It seems like a great solution for a small business that needs cash fast, similar to a credit card.

However, with the news that Cash Advance USA is investigated as a scam by the Department of Financial Institutions, this option doesn’t look so good. If you are in a situation where cash is needed immediately and high interest rates aren’t a concern, a credit card might be a better option. However, be sure to consider alternative small business loans first. Some of them are nearly as fast as payday loans.

In Conclusion: Small Business Financing Challenges and Solutions

There is no shortage of small business financing options today, although all of them have some drawbacks. Therefore, you should think carefully before making your choice. Weigh all pros and cons and decide what your business can realistically handle right now.