Small Businesses And Startup Funding
Too many businesses look at funding as something a lot more trivial than it really is. Business funding, for start-ups, small businesses, established businesses, and large corporations alike, is a determining factor which directly affects a business’ current operative capability, long-term success, and longevity.
Conservative approaches would dictate that the world of business funding as a flat line, stretching from banks as lenders issuing a loan, thorough a landmine of lawyers, accountants, business advisers, to the business owner’s pocket.
These approaches no longer apply, in a brave new world of alternative business funding. Financing is everywhere, you just have to find.
Updated: We have also included Australian Lenders in our overview such as OnDeck Australia, and Moula.
Updated: We have also tested Canadian lender Borrowell (for privates and businesses).
The first place a business owner would try to apply to, is the bank. We will try amount the pros and cons of this funding option, looking at it from a financial standpoint.
- Established facilities with strong government supervision, and tight regulation.
- Financing capacity to match even the largest of businesses.
- Often times, the interest offered is more favorable with the business than alternatives.
- Only roughly 20% of applications get approved.
- Most banks don’t deal with small loans under £ / $ 25,000.
- A lengthy back-and-forth process, with a lot of overhead costs for accountants and lawyers.
- A business plan must be presented, together with a cash-flow forecast.
- Collateral required (http://www.inc.com/guides/201101/5-tips-using-collateral-to-secure-a-small-business-loan.html).
- No less than 2 years repayment schedule, often with early repayment penalties.
Are bank loans suitable for my business?
Bank loans apply to a situation where an established business, with a good credit history, requiring larger than $25,000 in financing, looking for longer- term loans. It should also be a business that doesn’t require an instant cash-flow injection. The process could be lengthy, over several meetings, phones, requiring a wide array of notarized documents and business projections.
Even in such cases where a bank loan is actually approved (which is a task that has increasing in difficulty post 2008), it is still advisable to shop around for alternatives with other banks, or look at alternative business funding options.
Business loan alternatives to banks
Since the recession in 2008, non-bank small business loan providers have been proliferating in popularity among small business owners in the UK, and in the US.
Higher approval rate, different way to assume risk: All things considered, there is much higher likeliness of getting a business loan approved in these platforms that are geared towards small businesses, and thus can judge a business not only by its cover, nor credit score.
The type of risk estimate analysis made in each of the companies is proprietary, and doesn’t necessarily use the same variables that banks take into consideration. That means businesses that get unfavorable loan terms at the bank, or plain out [DECLINED] and/or received the bad credit mark from banks, might not only get their application approved, but actually get BETTER terms than they ever did with banks.
✓ Easy application: You apply, and deliver all necessary documentation via an online system. The number of documents a business owner is required to provide is smaller than bank requirements.
Online sellers can connect directly into their Paypal account, or eBay/Amazon merchant account, and the platform will automatically use all the data required from there.
✓ Promptness of process: Not only the application is extremely easy, but also the process itself is fully-automated. It is possible to get cash money in your bank account in just hours (the application itself could be approved in less than an hour).
✓ Flexible terms: the terms offered to each business are very tailored to its capabilities. So the structure of repayments is flexible. The interest you are offered applies to your business, and your business only, based on the company’s risk estimate of defaulting.
✓ Unsecured business loans: No collateral is required in any of these companies, but some of them definitely offer the possibility of getting a secured, lower-interest, loan.
✓ Loan terms: Most lenders offer loans of between 6 and 36 months, but there are no early repayment fines, and thus it is definitely possible to borrow money for a period of 1, 2, or 3 months.
Alternative funding lenders in UK USA and Australia provide services that are complementary to the ones offered by banks. These lenders specialize in small business lending. They are quick to act, more willing to approve loans, and have flexible terms (first and foremost – unsecured business loans).
Startup owners are more likely to get a personal loan than a business loan, considering they have no trading history. This is why many business owner often take personal loans, using their private properties as securities, to raise up a business. This has its advantages and disadvantages – it’s a highly debated content over the internet. You are welcome to read this Quora discussion and make your own mind, but we at 305startup.net think it’s sort of a moot point, all in all.
Those who take personal loans and assume all risk on their business, are usually doing so as a last resort. It’s not likely that businesses that could have taken normal business financing, sell equity, crowdfund, or use any other mean would resort to this.
Prosper does it better (US Only):
Best Alternative Business Funding Companies 2016 – Reviews – UK
Peer to Peer Business Lending
Available: UK, USA.
What is it?
A platform connectiing businesses of all sizes, with potential investors. Each business is assigned a risk score level, which determines the interest offered (obviously, the higher the risk, the higher the interest). Each investor can choose which business to invest into.
Loans are issued using a fixed interest, and a fixed repayment schedule, and there are no early repayment fines.
Is it any good?
We believe this is the best alternative to banks. An extremely credible company which is backed up directly bu the British government (10% of all available funds). Very low interest rates compared to the competition, and in more than a few cases cheaper than banks, starting from as low as 6% APR (standard UK/ US bank loans are 8 – 12% APR on average).
It has lent over half a Billion pounds up to date, and user reviews have been extremely positive up to date.
Typically, you can get the loan approved and deposited in your account with one week. Funding Circle Review is also available here.
2 years of trading for limited companies or partnerships. Minimal turnover of 50,000 Dollars or Pounds. Unlikely to accept bad credit businesses, but the vast majority of small businesses could successfully apply.
How to apply?
Click on this link to get into Funding Circle’s website, fill in your details, and get access to the intuitive platform. It’s that easy to sign up, and even easier to apply for a loan.
Quick Short Term Lending
Availabile: UK Only.
What is it?
Ezbob is a small business lending platform that raises money from private investors, as well as the EU treasury, and lends them to small businesses using a quick, easy, application process.
Is it any good?
Ezbob is an up and coming force in the UK. It has recently acquired Everline business credit, and gets media coverage and recognition on a constant basis. It’s easy to understand the interest rate you’ll be facing using an online calculator available on their website.
They are quick even when compared to other alternative lenders. Application is approved or declined in minutes. Money in the business’ current account as fast as 24 hours from time of application.
Users have been extremely pleased with Ezbob, in spite of relatively high interest rates (from 2% monthly interest), and believe this is a fair company to conduct business with.
Businesses of all sizes are happily accepted at Ezbob (with loans from 1,000 GBP up to 120,000 GBP). The only documents that are required are VAT and banks statements, and a minimum turnover of 10,000 Pounds per annum.
How to apply?
Click on the button below to apply. Registeration takes approximately 10 minutes!
What about startups and new business loans?
Some of the business funding options proposed above are not applicable for very new startups with no income or trading history. Even the lenders with the loosest criteria in regards to applicants, would not be able to finance a fresh out-of-the-box business with no collateral.
At the end of the day, as with all businesses, all lenders try to make money. When the risk of defaulting is too high, and lenders feel unsafe to lend their money, a personal guarantee must be in place. You can approach banks (less likely) and recommended platforms like FundingCircle (more likely) for a secure loan, with your personal assets as collateral. Even that could be problematic, if the collateral is real estate, which isn’t what it used to be pre-2008.
There are other alternatives though.
Here is a list of a few resources on different ways of raising money for your startup:
- Equity funding (http://www.forbes.com/sites/ericwagner/2014/03/18/equity-crowdfunding-101-is-it-right-for-your-startup/)
- Crowdfunding (http://www.pcmag.com/article2/0,2817,2408437,00.asp)
- Grants (http://www.businessnewsdaily.com/7695-small-business-loan-guide.html)
- Friends and family funding (http://venturebeat.com/2013/03/03/how-to-raise-startup-funding-from-friends-and-family/)
The moment we want to believe something, we suddenly see all the arguments for it, and become blind to the arguments against it.
- George Bernard Shaw
It’s time to wake up and smell the roses. Chasing banks for a business loan doesn’t necessarily have the be the only mean of funding a business. There are plenty of alternatives to consider. Devote the necessary resources to make an educated choice, and deal with this aspect as you deal with other core business aspects. Good luck.