5 Bank Loan Alternatives for Start-Ups

Gone are the days when start-ups and small business owners could easily access funds at low-interest rates and enjoy market liquidity. Due to the recent stock market crash and inflation surge, banks have been tightening their purse strings, leaving borrowers with limited funding options. 

The good news is there are alternatives to traditional bank loans available to start-ups and small businesses. So if you’re struggling to qualify for a bank loan or you’re not into your current options, here are five bank loan alternatives to consider. 

Microloans

Microloans, as the name implies, are small-size, short-term loans offered to small businesses, not-for-profit childcare centers, and others who may not otherwise be eligible for bank loans. 

With these loans, you can borrow up to $50,000 and about $13,000 on average, usually at lower interest rates than other alternative financing options. They can be used for various purposes, such as opening, improving, or expanding your business. 

The U.S. Small Business Administration (SBA) provides funds for micro-loans to SBA-approved intermediaries called microlenders adept at lending, management, and technical assistance. That’s why other microlenders provide training and education to potential borrowers apart from capital, making microloans an appealing option for start-ups. However, their requirements may vary, so it’s best to contact your area’s closest SBA-approved intermediary. 

Personal Loans

If your start-up doesn’t have reliable track records yet, apply for a CreditNinja loan, a kind of personal loan, or a similar option based on equity and personal surety rather than business history. Due to its easy and fast approval process, business owners and individuals in financially disadvantaged areas, like Mississippi, opt for this financing option.

Personal loan lenders won’t consider your business’s credit, cash flow, annual revenue, and debt for start-ups. Instead, they’ll look at your creditworthiness and capacity (i.e., debts and income). If you can make repayment on time and in full, your credit scores may benefit from the loan. Otherwise, your credit score will take a hit. But, of course, dealing with a failed business and delinquent personal credit is the worst scenario. 

Crowdfunding

Crowdfunding happens when you pitch your business ideas to a “crowd,” which can be businesses, organizations, or individuals. If they find your project worthy of investment, they’ll “fund” your venture in either of these four ways: rewards, donation, debt, or equity. 

Then, after receiving the needed boost to your cash flow, your start-up can gauge interest in and test the market, get off the ground or launch new projects, and even build a loyal following. 

The key to a successful crowdfunding campaign is capturing the attention of many backers and convincing them that your project is investment-worthy. Each crowdfunding site varies. For example, some only let funding within set time frames, some disclose specific monetary goals, and others are long-term community sites. 

So, go through the fine print and understand whether you’ll get all or nothing if going to this avenue. 

Angel-Invested Capital

If funds from traditional financing options or friends and family loans aren’t enough, angel capital can fill the gap. It’s a fund that so-called angel investors provide. They’re high net worth, business-experienced, accredited individuals or a group of individuals who invest their personal funds in the early stages of a company and help it find product-market fit. They usually do it in exchange for an equity (i.e., ownership) position within the business. 

Angel investors can be both financially and personally invested in a business. They help start-ups to get better to the point of profitability, so they usually participate and actively take on a hands-on role within the business. 

They’re more flexible and considered lower-risk than traditional bank loan alternatives. For instance, unlike business loans, you don’t have to pay the angel capital back if your business flounders. 

Business Venture

Another avenue of financing that exchanges capital for equity within a company is a business venture. However, venture capitalists, the investors of business ventures, only invest institutional funds in highly innovative businesses with solid growth potential. They tend to invest in companies with a considerable edge for exponential growth in a market and the ability to scale globally, unlike angel investors that take early-stage risks. 

On a positive note, venture capital can range from $100,000 for the seed stage to more than $25 million for more mature companies. Start-ups could raise it many times, allowing them to obtain large amounts of funds that would otherwise be impossible to access through other traditional financing options. In addition, venture capitalists provide start-ups networking opportunities, helping them forge new partnerships and raise future funding rounds.

Final Thoughts

In our current global financial crisis, it’s best to reconsider your business goals. But, more importantly, remember that sacrificing growth in the short term isn’t necessarily equal to failure but adaptability in a rapidly changing environment. 

Karan Jain

Born in the family of entrepreneurs and have inherited the same. Started building applications in order to pay for my tuition. Later founded a tech company, marketing agency, and media outlets.