How to Identify the Correct Lending Alternative for a Small Business

Jason Smith

Jason Smith

Senior Author

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Jason Smith

Senior Author

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The economies of most countries the world over rely on small businesses for stable growth. The US is in this same boat as well which is another reason Dodd/Frank and the ACA health care law has been so devastating since they have undermined small businesses but this is another topic. However and moreover, all small businesses need a constant inflow of capital to survive, expand, and succeed ultimately.

How to Identify the Correct Lending Alternative for a Small Business

A recent report published by the US Small Business Administration’s Office of Advocacy reveals that nearly all startups heavily rely on external debt and receive almost seventy five percent of their funding from banks and other financial institutions by way of loans, lines of credit and credit cards.

According to published figures, in 2013, over 5.4 million loans were given to small businesses and their borrowings amounted to a whopping $1 trillion. This included $585 billion in business loans that were outstanding as also $422 billion worth of credit from finance companies. The rest came from assorted sources.

This rapidly increasing demand for easy and quick access to working capital has in turn, sparked a fierce competition among all lenders to readily provide lending options to meet the ever increasing needs of all small businesses. However, the kind of financing they need varies on the present stage of the business and the industry to which it belongs.

The following are the 4 principal reasons why small businesses borrow money as also ways to determine the right lending alternative:

Every Business Needs Capital To Take Off

The golden rule of business is that if there’s no capital, there can be no business. That’s why the average cost of starting a business ranges anywhere between a few thousand dollars to over $100,000, depending on its nature.

However, getting that money may be extremely difficult because nearly all lenders demand to see a fruitful track record of profit and success. So in the case of any start up, its promoters need to figure out first how much they need. One may make use of the Starting Cost Calculator that is available online through Entrepreneur.com.

This helps them itemize all costs that they are likely to incur as they start the business. The next step involves raising such necessary funds. If a bank refuses to help out, the promoters’ immediate network of friends and family may be approached for this seed money. Additionally, crowd-funding sites like GoFundMe, IndieGoGo and TrustLeaf may also be scoured for the initial seed capital.

No Funding, No Expansion

Once the business takes off and establishes an acceptable track record, it has to expand in order to grow and survive the competition. However, loans may still be hard to come by for such business-growth operations. You may approach SnapCap.com which offers credible alternatives to businesses for getting loans quickly. SnapCap even approves and disburses loans within hours of the application being submitted. One of course, needs to show a revenue earning of at least $100,000 the end of the first year of operations with a minimum credit score of 500.

Inventory, the Lifeblood of Business Operations

Retail or product-oriented businesses are always having to open the door for financing for purchasing additional inventory to maintain regular supply and profitability. Moreover, due to seasonal shifts in sales and therefore, in cash flow, a business may experience greater demands for a particular product at specific times of the year.

A loan taken to stock up on inventory helps bridge the gap.  The actual situation is when one is in a position to buy something on offer for a limited span of time or by its nature has a relatively shorter shelf life, a quick capital solution may always be required. That’s why alternative funding comes in handy, particularly when the need is pressing and a conventional bank may take weeks to process the loan application.

More Muscle for a Business

For those businesses with fluctuating cash flows and which are also growing, revenue-based financing happens to be a very suitable choice to cater to their constant demand for funds. Selling receivable by credit card is generally good for businesses, where a majority of customer payment methods happen through credit cards.

This implies that a small business owner can get a loan equivalent to the money he expects to receive by way of credit card sales in the following month, so that he can limit cash flow inconsistencies arising out of fluctuations in sales. These programs come with variable repayment options that work with a merchant’s cash flow as compared to a fixed amount of payment.

Receivable-based financing also is ideal for B2B businesses. These loans use the business’s receivables as collateral and cover for shortfalls in cash flow for the period stretching between when invoices are sent to customers and when payment is ultimately received. This is usually for a period of 60 – 90 days, which in turn streamlines the business while also strengthening the firm.

Final Choice

The fact however, is that there is no “one size fits all” lending solution for any business. Alternative lenders need to be chosen on their focus on improving the business’s overall experience, when it appeals for external capital.

For early-stage businesses or start-ups, micro lenders with online application facilities are more suitable. On the other hand, for a somewhat developed, later-stage business, nonbanking SBA lenders with online loan disbursing facilities, community banks, and credit unions seem more appropriate.

In sum, any small business owner has a multitude of options available to him to get external capital for starting up, sustaining operations, expanding, and ultimately succeeding.

However, it is of the greatest importance to have a perfect understanding of all options available and how they will cater to your business’s specific needs is the key to ascertaining the most appropriate lending option. An option that is not only best for your small business, but offers a quick turnaround and a terrific user experience.

Jason Smith


Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state. 

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