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Private equity (PE) is often tangled with venture capital (VC) because they both invest in companies and use a variety of exit strategies, such as selling their stake during IPOs. However, there are some significant differences in the way they do business. Both invest in different types and sizes of companies, spend different amounts and even claim different percentages of equity.

Let’s have a closer look at the core differences between PE and VC firms, and try to characterize the variables that are pushing them to adopt one another’s strategy.

Private Equity

What is Private Equity?

Private equity is a form of investment that is much more hands-on than a venture capital investment. Instead of investing to own a stake in the company, a private equity firm acquires the entire company in the form of a buyout. 

Usually, the company in question is facing some type of difficulty or is distressed in some way. The PE firm evaluates the company and has a plan for how to resurrect it and make it more valuable. There's also usually an exit strategy in mind to sell the company within a few years in order for the PE firm to turn a profit. 

Who funds these private equity deals? In most cases, the answer is institutional or accredited investors. This includes investors such as:

• Pension funds
• University endowments
• Insurance companies
• Sovereign wealth funds
• High-net worth individuals or family offices

Types of Investments

Private equity funding can be packaged in a few different ways. The most common types of deals are buyouts, secondary buyouts, and carve-outs. Here's what each of these means.

Buyout 

This is the most well-known of private equity deals. A PE firm acquires an entire company to gain complete control of major decisions. The strategy can be used on private, public, or closely held companies. 

Secondary Buyout 

With a secondary buyout, a PE firm buys a company from another private equity group instead. The reasoning may be to fix a distressed company or to acquire a company to work with other relevant companies owned by the purchasing PE firm. 

Carve-out 

Instead of purchasing an entire company, a carve-out allows a PE firm to purchase a certain division of a company. It usually does not involve the parent company's core operations.

Venture Capital

What is Venture Capital?

A venture capital (VC) investment is a type of private equity, but instead of focusing on established companies, investors typically pick startups with the potential for major growth. VC investors can include individuals, investment banks, incubator programs, other types of financial institutions, and corporations.

In exchange for an investment, venture capitalists typically gain ownership of a percentage of the business. When profits are distributed or the company is sold, the investor gets that percentage of the total. 

For example, if a VC investor invests $250,000 for 15% equity, then the startup gets acquired five years later for $10 million, the investor's 15% stake will result in a $1.5-million payout. 

Types of Investments

There are usually two types of investments venture capitalists make in startups: an initial seed round of funding or a range of series funding as the company becomes more established.

Seed Funding

This is typically the first round of formal investment for startups. Some may have had a pre-seed funding round, which usually just raises capital from the founder's family and friends. In the seed round, the startup is still at an early stage, but has a concept and early proof of concept to entice VC investors.

Series Funding

As the startup becomes more established, it may opt to engage in additional rounds of funding. Each round is given a new title in succession: series A, B, C, D, and even E funding. Typically the company raises more money in each round.  

• Series A funding: $2 to $15 million
• Series B funding: $7 to $10 million
• Series C funding: average of $26 million

Private Equity Vs Venture Capital

Core differences: PE Vs VC Firms

Private equity firms buy established, inefficient companies, take total control, and make them more efficient to escalate revenue. They also attempt to capitalize on mispriced assets. 

Venture capital firms, on the other hand, purchase only 50% or smaller stakes in startup companies that they believe have the greatest growth potential.

While PE firms invest in a specific company and concentrate their expertise on a particular sector, VC firms like to diversify and reduce their risk profile. Usually, VC firms are limited to technology, biotechnology, and clean air companies. VC firms also often limit their investment to $10 million in each company. PE firms are open to how much they invest, particularly since they're usually buying out an entire company.

The core difference between the two is where they put their money. PEs invest in established businesses while VEs invest in startup growth.

Risk and Return

VC firms understand that most of the companies they invest in will not be profitable. But  they expect that at least one of them will turn in huge profits and make the fund profitable. Because startups can be so unpredictable, they basically hedge their bets across multiple investments. 

Fred Wilson, a $1-billion, New York-based VC fund, expects that out of the 25 growth companies it has invested in, about 10 will fail, one will turn extraordinary profits, about five will give solid returns, and the rest will be wiped out. 

Another key difference between VC and PE? VC firms use only equity to finance their purchases, but private equity investors use both equity and debt.

Additionally, PE firms have concentrated exposure in one or a few particular industries, so they have to bear additional risk. Their holdings in the companies are so extensive that, if one of the companies failed, the fund would mostly fail. However, shouldn’t higher risk translate to higher returns?

Modern portfolio theory proposes that greater risk is compensated with higher returns, but here, VC firms, even with the higher risk, are targeting the same returns as PE firms, and actual returns for both, are also very similar.

Small business owners who want to retain full ownership of their companies will most likely want to avoid outside investment. 

Instead, apply for a small business loan to get the exact amount of financing you need without having to give up equity in your company. 

Crowdfunding is a term used to describe individuals coming together to support—and directly fund—projects by other individuals and organizations. For small businesses and startups, crowdfunding can be an engine for job creation and development.

Compared to other methods of raising money, crowdfunding is very new, but has nonetheless already provided many businesses with the capital they needed to jumpstart and expedite their growth and potential.

Types of crowdfunding.

Types of crowdfunding.

Prospective and established small business owners can use crowdfunding platforms to jumpstart their next project, and there are four models of crowdfunding they employ to do so:

• Donations, philanthropy and sponsorship - Like it sounds, this form of crowdfunding involves people donating money for nothing in return.
• Lending - Also known as peer-to-peer lending, this model involves individuals lending a certain amount of money to be repaid with interest.
• Equity-based crowdfunding - The company sells shares of the company.
• Rewards-based crowdfunding - Anyone who donates money receives a reward, such as a discounted product or swag.

Anyone with questions about crowdfunding should first decide what they’re willing to give (if anything) and how they intend to excite potential donors to invest in their company.

How crowdfunding works.

How does crowdfunding work for businesses?

For a business that wants to use crowdfunding to raise capital, the first step is to decide what type of crowdfunding it wants to pursue. All types are available to small businesses, but there are benefits and drawbacks to each. 

Businesses that want to avoid paying additional taxes may want to steer clear of a rewards-based crowdfunding campaign. While the reward is given in exchange for a "donation," to the IRS, it is a sales transaction and is considered taxable income. 

To start a crowdfunding campaign, you’ll need to choose a crowdfunding platform. Crowdfunding platforms revolve around a specific type of crowdfunding. They're all a little different and are often aimed at specific demographics.

Once you've decided on the type of crowdfunding campaign you want to run, you will need to create a campaign page that explains what you need the money for and how you intend to spend it. Successful campaigns often provide videos to help motivate and excite donors.

Do crowdfunding sites charge money?

Yes, they do. The amount varies with each site, but it’s not uncommon for platforms to charge 5% or more of the total funds raised, plus a transaction fee for each donation. If you have an exact amount you need for your small business, you’ll need to calculate the fees when determining how much you need to raise.

Can crowdfunding money be used for anything?

Any money raised through crowdfunding must be used for the exact purpose stated to the public. Therefore, if you state that you need the money to cover manufacturing costs, you cannot turn around and use any funds raised to purchase stock or real estate.

Crowdfunding pros & cons.

The pros and cons of crowdfunding.

Consider the following pros and cons when considering using crowdfunding to fund your business.

Pros:

• Serves as a marketing tool - Crowdfunding can be a company’s first exposure to the world and can therefore be used as a means to advertise to the general public
• Provides a forum for feedback on the project - It’s common for investors to provide needed feedback on a service or product they have invested in; this feedback may be essential for your company’s long term success in the market
• Fees are minimal - Crowdfunding platforms take only a small percentage of the funds you raise from investors 
• Inexpensive way to raise funds - No traveling is needed to speak with investors, nor does it cost that much to establish. You can spend money to launch and run a campaign, but the amount you spend is up to you.
• Can make it easy to communicate to your investors - With all of your investors in one spot, communicating to them is a lot easier.
• May not have to give up equity depending on which type of crowdfunding campaign you choose - Equity crowdfunding is just one type of crowdfunding. Other methods don’t require selling portions of your company, which means you will be able to keep more of the profits for yourself.
• Is a valid alternative to bootstrapping and debt - Not too long ago companies had very few options when it came to raising money, but crowdfunding has changed that.
• Can create excitement over your project or product - Smart companies realize that raising money through a crowdfunding campaign is only one benefit—the other is generating buzz and excitement pre-launch. 
• Provides partial proof of concept - While a successful crowdfunding campaign is not complete proof of concept, it is still a very good sign. Full proof of concept is only established once the product or service is launched and is financially successful

Cons: 

• Often limited on amount of funding you can raise - Companies can not raise more than $5 million in a 12-month period
• Exposes project to the public, risking copycats - it’s not uncommon for companies to avoid crowdfunding altogether if they are currently unable to afford a patent because some companies use crowdfunding sites to get ideas for new products 
• Funds may be subject to securities regulation - Companies selling securities via crowdfunding must comply with all federal security laws, regardless of the platform they choose
• Takes a lot of work to find investors - It’s unlikely investors will find your page on their own and give you money. Successful campaigns often involve full-blown social media activity to attract attention.
• Takes a lot of work to create a campaign - Making a donation page, shooting a video, and filling out all of the appropriate paperwork takes more time than you may be willing or able to give.
• Dwindled influence of the crowdfunding model - Thanks to too many scammers, some investors have grown weary of crowdfunding altogether.
• Does not necessarily show proof of concept - There are many examples of "successful" campaigns that did not translate to the real world of business. 
• Can be expensive to get going - If you contract your campaign’s creation, you may end up having to spend more than you want.
• Too much competition on crowdfunding sites - Just creating a campaign is unlikely to be enough, and it can take a lot of work to have your project stand.

Crowdfunding sites

Crowdfunding sites

Popular crowdfunding sites include:

• Indiegogo
• Classy
• Seedinvest
• FundRazr
• Fundly
• Startengine
• GoFundMe
• Mighty Cause
• Kickstarter
• Fundable
• WeFunder
• EquityNet
• Patreon

To choose the best crowdfunding site, decide which type of campaign you want to create and compare the fees charged on each. It’s rare for investors to scroll through campaigns. Instead, many learn about investment opportunities on forums and social media. Therefore, don’t worry too much about where you launch your campaign because everything comes down to how it’s promoted. 

Crowdfunding tips

Tips for a successful crowdfunding campaign.

Like any other type of business financing, crowdfunding requires strategic thought, upfront work and a commitment to reach out to potential investors. Consider the following tips when planning your crowdfunding project.

1. Choose the right site for you - Some sites occupy a specific niche, such as arts or nonprofits. Find the one that fits your business and your ideal donor demographic. You can run multiple campaigns at the same time through different sites, but you will want to consider how. 
2. Set a realistic target and time limit - Asking for too much or too little can affect your project’s chances of success.
3. Create a campaign video - A personal touch—which video excels at— can pay off. In fact, projects with videos outperform those without by 125%.
4. Post regular campaign updates - Keep supporters engaged to maintain momentum. The more buzz and excitement you can generate and maintain for your project, the more likely your donors will recommend your project to their peers. If done correctly, they may even promote your campaign for you. 
5. Connect with friends and family first - Begin with word of mouth among your inner circle, then promote your campaign on social media. Some donors are more likely to contribute if they feel the campaign is already in motion and gaining traction. 
6. Offer rewards - Supporters may be more eager to back you if you offer a small incentive. Just remember that doing a rewards-based crowdfunding campaign means you will pay tax on any money received. 

Crowdfunding is an exciting new way to raise money for your small business, and there are a lot of opportunities to be had. However, you may still require additional capital after your campaign ends even if it is successful. 

Learn more about your business funding options today at Lendio.

Financing your business with an SBA loan can help you invest in the things you need to grow your revenue. However, in addition to your financial documents and business plan, some SBA loans come with insurance requirements. When your loan terms come with collateral obligations, that property also needs to be covered with a hazard insurance policy. 

Here's what to know about hazard insurance and when you need it.  

Hazard Insurance Explained

Hazard insurance is a type of business property insurance that covers damage caused by accidents or natural disasters. Your insurance policy will outline "covered events." These are the types of events that may occur and cause damage. When that happens, your hazard insurance kicks in and covers the damage (within the limits of your policy).

Most hazard insurance policies include the following covered events:

• Theft
• Vandalism
• Fire damage
• Some water damage (caused by things like burst pipes, but not natural flooding)
• Storm damage 

In addition to covering the building itself, hazard insurance also covers the property inside. This includes any damage caused to:

• Furniture
• Equipment
• Inventory
• Tools

Limitations Of Hazard Insurance

Hazard insurance policies don't give your business an automatic blank check when a covered event occurs. Each policy comes with a coverage limit for both the building and the property within. So it's important to get a policy large enough to cover a worst-case scenario, such as a total loss.

Your hazard insurance policy will also come with a deductible—the amount you're responsible to pay before your coverage kicks in.

SBA Hazard Insurance Requirements

The SBA hazard insurance requirement applies to property that is used as collateral. Most SBA loans, including 7(a) and 504 loans, require some type of collateral in order to be approved. 

Because it's used as collateral, the property must be properly insured. That way, if there's any damage done that's out of your control, the building can be repaired or replaced and still maintain its value.

Here's the breakdown on hazard insurance requirements for each type of SBA loan:

• SBA 7(a) loans - Hazard insurance is required for loans of $25,000 or more.
• SBA 504 loans - Usually the property being renovated or purchased is used as collateral.
• Microloans - Hazard insurance is not required, but flood insurance might be.
• Economic Injury Disaster Loans (EIDL) - Hazard insurance is required for loans of $25,000 or more.

Types Of Business Property Insurance

Not all insurance companies refer to property insurance as hazard insurance. Instead, they may call it commercial property insurance. Here are some options to explore as you look for coverage required by the SBA.

Commercial Property Insurance

Commercial property insurance is the same thing as hazard insurance. Any covered events provide reimbursement for building repairs, as well as damaged items within the building. With this type of insurance, you would need to file a claim for your business. Then an insurance adjuster would assess the damage and provide you with reimbursement accordingly.

Flood Insurance

Anytime your commercial property is located in a flood zone and used as SBA loan collateral, you'll need a flood insurance policy as well. That's because damage caused by flooding is not typically included in most hazard or property insurance policies. 

To see if you need flood insurance, first visit FEMA’s online flood map tool to see if your property's address is located in a flood zone and then check your need for insurance when you apply for an SBA loan. If you do, you will need to pay an extra premium, but it will be worth the investment, if you're in an area at risk of flooding. 

How To Get Business Hazard Insurance For An SBA Loan

If your commercial property isn't properly insured, you'll need to purchase a hazard policy as part of your SBA loan funding process.

Follow these steps to ensure you're in compliance with your loan terms:

1. Choose a licensed insurance agent - Even though licensed insurance agents typically receive a commission on your purchase, they are best equipped to help you find the right business coverage for your needs. Specifically seek out one who is experienced in meeting SBA loan requirements. 
2. Compare policies - With the help of your insurance agent, compare the terms of all of your hazard insurance policy offers. Compare premium costs and coverage to make sure you get the right balance between the two.
3. Name your lender as the loss payee - It's standard practice to name the SBA, your lender, or CDC as the loss payee on your hazard insurance policy. They have a vested interest in ensuring the property is repaired or replaced. In some instances, they may monitor how the insurance funds are used.
4. Maintain your hazard insurance policy - Keep up with your insurance premiums to stay in compliance with your SBA loan terms. You cannot cancel or reduce the insurance policy unless there is some justification that the insured assets have been reduced or depreciated.

Getting proper hazard insurance is just one step in obtaining an SBA loan. Lendio's team of experts can help you throughout the entire process. Apply for an SBA loan now!

The U.S. Small Business Administration (SBA) offers a variety of attractive loans to small businesses in the U.S. SBA Express loans are one popular loan option you might want to consider if you need no more than $500,000 in funding. Just like other SBA loans, Express loans offer low interest rates and flexible repayment terms that you may not find elsewhere. 

Compared to other SBA loans, however, these financing solutions come with much easier applications and faster approval times. Let’s take a closer look at what SBA Express loans are and how they work, so you can decide if they make sense for your unique situation.

What is an SBA Express loan?

An SBA Express loan is part of the SBA 7(a) loan program, which is the most popular SBA funding option. Upon approval from an SBA-approved lender, you can use the funds for a wide variety of business-related expenses, such as commercial real estate, equipment, working capital, debt refinancing, or business expansion. 

You can choose from the standard Express loan or Export Express loan and lock in up to $500,000 in funding. While repayment terms depend on loan type and purpose, they go up to seven years for lines of credit, 25 years for real estate loans, and five to 10 years for other loans. 

The lender, loan size, and your financial situation will dictate the interest rate you may receive, but SBA Express loans cap out at the prime rate plus 6.5% for loans of $50,000 or less and the prime rate plus 4.5% for loans greater than $50,000. The chart below outlines the key components of these loans.

Types of SBA Express loans.

There are two types of SBA Express loans, including standard Express loans and Export Express loans. Let’s dive deeper into the details of each one.

Standard SBA Express loans.

Standard SBA Express loans are designed for qualifying small businesses that operate in the U.S. or the U.S. territories. The SBA responds to applications for these types of loans within 36 hours. With a standard SBA Express loan, you can borrow up to $500,000 and enjoy an SBA guarantee of 50%. While interest rates max out at the prime rate plus 4.5%, they ultimately depend on your qualifications, lender, and loan amount.

SBA Export Express loans.

SBA Export Express loans differ from standard SBA Express loans in that they’re geared toward exporters. If you’re in search of funding to support export activities for your business, this option is worth exploring. The SBA will guarantee 75% of loans that are larger than $350,000 and 90% of loans that are less than $350,000. Approval times are also shortened as the SBA will respond to applications in no more than 24 hours.

How SBA Express loans work.

You can apply for an SBA Express loan through an SBA-approved lender, which may be a bank, credit union, or online lender. To do so, you’ll need to complete SBA Form 1919 and any other forms the financial institution requires. While down payment requirements vary, 10% is typical and startups may have to put more down. 

Also, if you opt for an Express loan of over $25,000, you will need to back your loan with collateral. If you choose an Export Express, you’ll need to adhere to the particular collateral requirements set forth by your lender. 

Even though each individual lender will make their own eligibility decisions, the SBA will respond to Express loan applications within 36 hours and Export Express loan applications within 24 hours. This is much faster than the five to 10 business days the SBA usually takes for other types of loans. Keep in mind that funding times are also lender-dependent, but are typically completed within 30 to 60 days.

How to take out an SBA Express loan.

If you’re interested in an SBA loan, follow these steps to get one.

1. Determine your borrowing needs: Since SBA Express loans cap out at $500,000, it’s important to figure out how much money you need. If you’d like to borrow more than $500,000, you may have to explore alternative financing solutions.
2. Verify your eligibility: Before you go ahead and apply for an SBA Express loan, make sure you meet all the criteria. Your business must be considered a small business by the SBA and have reasonable owner equity to invest. Plus you’ll need to prove that you’ve already invested financial resources toward the business. In addition, you’ll be required to meet the individual lender’s criteria, which may include a minimum credit score of 650, at least two years in business, and strong annual revenue. 
3. Choose a lender: Not all SBA lenders are created equal. That’s why you should shop around and find the ideal option for your unique situation. You can always use the SBA lender matching tool on the SBA website to help you out.
4. Fill out SBA Form 1919: Once you decide on a lender, complete SBA Form 1919. Be prepared to share information about who owns the business, what you intend to do with the funds, the number of employees you have, and whether you’ve received any SBA loans in the past. Double-check your work to avoid errors and inaccuracies, which may lead to delays with approval and funding. 
5. Submit documentation: Some lenders will ask you to provide certain supporting documents with your application. These may include business credit reports, financial statements, personal and business tax returns, and a business plan.
6. Wait for approval: As stated, the SBA will respond to standard Express loan applications within 36 hours and Export Express loan applications within 24 hours. Once the lender receives the green light from the SBA, it’s up to them to approve your application and distribute the funds. In most cases, however, you’ll be able to close on your loan within 30 to 60 days.

Pros and cons of SBA Express loans.

Like most business financing solutions, SBA Express loans come with benefits and drawbacks you should consider, including: 

Pros

• Fast turnaround times: If you’re in need of an SBA loan with quick approval and funding times, the SBA Express loan may be a good option. Depending on the type of loan you choose, the SBA may approve your application within 24 or 36 hours. This is quite fast when you consider that it typically takes them at least five to 10 business days to approve other types of loans.
• Flexibility with collateral: As long as your loan is less than $25,000, the SBA doesn’t require collateral. If you don’t want to put your personal or business assets on the line, you’re sure to appreciate this type of flexibility. 
• Easier application: Compared to other types of SBA loans, SBA Express loans have simpler applications. It won’t take you as long to apply for them, so you can expedite the process of securing funding.

Cons

• Smaller borrowing amounts: SBA Express loans cap out at $500,000. While this might seem like a lot of money, it might not be sufficient if you have plans to purchase expensive equipment or acquire a business. You might want to consider the traditional SBA 7(a ) program if you need to borrow more money. 
• Must meet certain qualifications: Unfortunately, SBA Express loans aren’t available to just anyone. To take advantage of them, you must meet stringent criteria set forth by the SBA and the lender you choose. 
• Lenders may take a while to distribute funds: Even though the SBA approves SBA Express loan applications quickly, it’s up to the individual lenders to provide funding. Depending on the lender you choose, you may still have to wait weeks or even months for the money.

Bottom line

If you’re in the market for an SBA loan, but want to skip the lengthy application and longer approval times of the traditional SBA 7(a) loan, the SBA Express loan should be on your radar. Before you sign on the dotted line, however, weigh the pros and cons to ensure you’re making the most informed decision. Learn more and apply for SBA loans.

For business owners and entrepreneurs with a large amount of savings, the main obstacle to starting a business is often coming up with a viable idea. Yet many aspiring entrepreneurs have a different problem—the idea is there, but the capital isn’t.

Startup funding or startup capital is something that every new business needs to get off the ground. As an entrepreneur, however, the challenge is figuring out where to find the startup funding you need to launch your new business. On a positive note, there are many startup funding options available if you know where to look.

How do startups receive funding?

Accessing startup financing can be a struggle. Traditional banks rarely offer business loans to brand-new entrepreneurs. Before lending any funds, many lenders prefer to see a proven financial track record that demonstrates an ability to repay the funds a business loan applicant is seeking. Without that financial history, the lender does not have the foresight to predict whether your venture may be successful enough to make good on your obligation.

These challenges create quite a conundrum for would-be entrepreneurs. How do you get the capital you need to get your startup off the ground when banks are unlikely to approve you for traditional business loans? 

The good news is that there are multiple ways small business owners can find the startup funding they need. Some entrepreneurs find alternative financing options to fund their startups, some turn to investors, and others rely on self-funding to get the job done. Additionally, there are a few out-of-the-box ways to access startup capital available. One of the key ways to succeed as a new business is to find the right combination of startup funding that works for you.

Startup funding stats.

• 54% of SMB ownersstarted their business with personal funds with another 12% relying on friends and family. 
• 79% of SMB owners needed less than $100,000 to start their business with 43% needing less than $10,000.
• The average loan amount for a small business owner is $47,000.*
• A small business has a median of five employees when it is first funded by an outside lender.*
• A small business has been in business for about three years (a median of 40 months) when it is first funded by an outside lender.*

*Based on internal Lendio data of 300,000+ loans funded since 2013.

Types of startup funding.

Below are 11 types of business funding that are available to startups. Read on to discover whether one or several of the following startup funding options might be a good fit for your new business. 

1. Alternative business loans

Small business loans from alternative lenders can be a solid funding resource for new startups. These loans often feature more lenient qualification standards compared with traditional business loans. As a result, alternative business loans may be a better fit for new businesses that are unable to qualify for other types of business financing. 

In addition to less stringent requirements, alternative business loans also feature other benefits such as credit-building potential and faster funding speed. And these small business loans may offer more flexibility when it comes to how you use the money you borrow as well. 

2. SBA startup loan

The Small Business Administration (SBA) is typically known for providing loans to established businesses. However, that doesn’t mean there’s no hope for an entrepreneur who’s trying to get their new business venture off the ground. 

If you are able to meet the SBA’s borrowing requirements, you may be able to qualify for an SBA loan even as a startup. Generally, these loans are available to partially-financed startups. The SBA likes to see the business owner have some “skin in the game” with around 30% of the owner’s own money in the business. The SBA also prefers to work with startups where the owner has some experience in the industry and in management.

It’s also important to note that the SBA itself does not issue loans. Rather, the agency establishes the guidelines for an approved intermediary and guarantees a percentage of the loan (in the case of default) which minimizes the risk to the lending partners. This financing vehicle is available to small businesses when funding is otherwise unavailable on reasonable terms. To learn more about SBA loans for startups, or to see if your business qualifies, check out this helpful SBA loan guide.

3. Microlenders

Entrepreneurs who cannot secure startup funding from other sources may also want to consider working with microlenders. Microlenders are often non-profit organizations that offer loans to small business owners—sometimes including startups—for small amounts. The loan amounts from microlenders can vary, but frequently range from $5,000 to $50,000. 

Some microloans are available to specific categories of small business owners, such as women-owned businesses or minority-owned businesses. But other microloans may be obtainable by entrepreneurs that fit in broader categories. 

The Small Business Administration also offers a microloan through SBA funding intermediaries for up to $50,000. The SBA micro loan option does not require any collateral from the borrower and is available to eligible businesses, including startups. 

4. Business line of credit

Business lines of credit are among the most flexible ways to help fund your startup. These credit lines can provide a business owner with quick capital, which they can use to meet a variety of business needs or resolve a cash flow gap.

When you open a business line of credit, the lender gives you a credit limit which represents the maximum amount you can borrow on the account. You are not required to use any of the funds until you need them, and the lender only charges interest when you access your credit line. 

As you repay the money you borrowed, you also eliminate the interest the lender charges you. At the same time, you regain the ability to borrow against the same credit line again in the future—up to the credit limit—as long as the account remains open and in good standing (and the draw period is active on your account). 

5. Business credit card

A business credit card could be another helpful type of startup funding to consider when you open a new business. Even if your business is brand new, you might qualify for this type of account if you have a good personal credit score. 

There are many ways that a business credit card may benefit your new startup. First, a well-managed business credit card might help you build good business credit for the future, if the card issuer reports the account to one or more of the business credit reporting agencies. And a business credit card can also be valuable for helping you keep personal and business expenses separate. 

You can also use a business credit card to help you manage business cash flow. However, it’s best to pay off your full statement balance each month if possible to avoid paying expensive interest charges on the account. 

Finally, some business credit cards feature valuable rewards or cash back benefits. And while you should never spend extra money to chase rewards, there’s nothing wrong with earning extra perks on purchases that you already need to make for your business anyway. 

6. Crowdfunding

Crowdfunding is another strategy that some entrepreneurs use to generate funding for new startups. Websites like Kickstarter and Indiegogo are examples of helpful tools that can help entrepreneurs raise small amounts of money from a large number of investors. 

In addition to equity crowdfunding (as described above), some small business owners use debt crowdfunding to borrow small amounts of money from numerous lenders. Donor crowdfunding is another option to consider as it allows entrepreneurs to raise donations to support their business goals. 

When the crowdfunding process is successful, it can result in an influx of startup funding to support a small business’ goals. However, results can vary and many entrepreneurs find that crowdfunding campaigns fall short of reaching their funding needs.

7. Venture capital

You may be able to get funding from investors for your startup in the form of venture capital investments. With venture capital, you give up partial ownership in your business in exchange for investments. 

Venture capitalists take on a lot of risk. There’s a chance these investors could lose all of their money if a new business venture doesn’t succeed. As a result, most venture capitalists typically focus on working with companies that display high-growth potential. 

As mentioned, you typically need to be prepared to offer partial ownership in your company in exchange for venture capital investments. You might also have to agree to allow investors to play an active management role as well, or at least have a seat on the board of directors. By taking a more active role in the startups in which they invest, venture capitalists often aim to improve their chances of success. 

8. Startup accelerators

A startup accelerator is a small business mentoring program that has the goal of accelerating the growth of your new business venture. Typically, you must apply to be accepted into a startup accelerator, and you’ll need more than a good business idea to qualify. Many startup accelerators require startups to have an actual product (or at least a prototype) ready to produce and promote. 

If a startup accelerator program approves your application, it will typically require you to sign over a percentage of equity in your company (often 5% to 10%) to secure a spot in the training program. Should the accelerator help you find other investors, you may have to surrender additional equity to secure more startup capital in the future.  

9. Small business grants

Small business grants represent another unique and appealing way for startups to seek funding. Unlike business loans and other types of financing, you do not have to repay grants, nor does this type of funding feature the added expense of interest or fees. 

On the other hand, competition tends to be high for small business grants. Therefore, you should be prepared to conduct research and often submit numerous grant applications if you hope to use this strategy to fund your new business venture. 

Even if you apply for dozens of grants, there’s no guarantee that you’ll receive the funding you seek. But it doesn’t hurt to try as long as the process doesn’t become so time-consuming that it keeps you from completing other important tasks in your startup business journey.

10. Personal savings and credit

Many small business owners rely on personal savings or personal credit to fund their startup business ventures. The SCORE Foundation (powered by the SBA) says that 78% of startups receive capital from personal savings or income from another job. MasterCard® research also shows that 46% of small businesses use personal credit cards. 

It’s important to understand that using personal funds or credit to invest in your own startup carries significant risks. For example, some entrepreneurs might withdraw funds from savings or retirement accounts to launch a new business venture. Yet before you consider taking such a big risk, it’s important to consider what would happen if the new business failed and make sure that possibility is something you could survive. 

11. Family and friends

Some small business owners have the privilege of being able to turn to family and friends for support of their new business ventures. And whether your loved one wants to get involved as an investor, a lender, or a donor, receiving a helping hand from someone close to you can mean the world when you’re working hard to turn your business dreams into reality. 

According to NorthOne, around 10% of small business owners used funds from friends or family in 2021. Yet before you accept loans, investments, or donations from loved ones, it’s important to consider the potential hidden cost. 

Even the best-made business plans do not always succeed. If your startup fails and you’re unable to repay your loved one (or if their investment turns into a bad one), that loan or investment could become a financial loss for your friend or family member and damage important relationships. So, before you accept any startup funding from loved ones, it’s important to put all of the loan or investment terms in writing and have an honest conversation about the risks involved.

Next steps

There are many different ways to get startup capital for your business without a traditional bank loan. So take the time to review your options and figure out which ones work the best for you. If you decide to borrow money for your startup, it’s also wise to compare multiple financing options to make sure you find the best deals available for your situation. 

As a responsible business owner, it’s also important to understand how much financial assistance you need and can afford to repay. Before you apply for any financing you should have a plan in place to pay back the money you borrow without putting yourself or your new business under financial strain.

For many people, the American Dream is to take a great idea and turn it into a thriving business. Yet it’s rare that a great idea alone will convince an investor or lender to take a chance on you. Before a lender in particular will approve your application for a business loan, you typically need to prove that you and your business are good credit risks. 

Some borrowers may have trouble satisfying the qualification requirements of traditional commercial lenders—especially startups and small business owners with less-than-perfect credit. This inability to access financing could be a key factor that drove 61% of small business owners to rely on personal funds to address financial challenges in their companies in 2021 (based on a Federal Reserve report). 

If you find yourself in a similar situation where you need business capital, but traditional financing doesn’t make sense, peer-to-peer (P2P) lending could be worth considering. Here’s what you need to know about how this alternative business loan solution works. You’ll also learn whether P2P loans are safe and how to determine if they are the right fit for your small business. 

What is peer-to-peer lending?

Peer-to-peer lending is a method of borrowing money that allows you (aka the borrower) to access funds from multiple investors (aka peers), rather than a single lender or financial institution. Due to this unique borrowing structure, P2P lending is sometimes called person-to-person lending or social lending, as well.

P2P lending platforms utilize technology to bring different investors together to fund an individual loan. Some P2P platforms may even allow lenders to compete with one another to make loans—sometimes (though not always) resulting in more attractive interest rates and loan terms for borrowers than they might receive elsewhere. In other scenarios, borrowers may be able to qualify for financing that they might not otherwise have qualified to receive.

How does peer-to-peer lending work?

Peer-to-peer lending marketplaces use fintech (aka financial technology) to match would-be investors with would-be borrowers who are seeking various types of loans. It’s important to understand that P2P platforms are not lenders themselves. However, the online platform can help perform the following tasks:

• Collect and process a loan application from the prospective borrower 
• Facilitate a credit history and credit score check 
• Share your potential loan offer (including APR and fees) if you’re eligible for financing
• Move your loan to the funding stage, if you accept the offer
• Share your loan listing with investors to see if any are interested in funding it
• Service funded loans, process monthly payments, and divide payments among investors
• Contract with third-party debt collectors to collect defaulted debts

Is peer-to-peer lending safe?

The U.S. Small Business Administration (SBA) notes that peer-to-peer loans could be a practical alternative financing solution for small businesses. Yet the agency cautions that there are both benefits and drawbacks to consider before a business decides to move forward. 

As a borrower, one of the first details you should understand about a P2P loan is the cost. In addition to the interest that the investors charge on your business loan, the P2P platform may charge supplemental fees. (Investors may pay fees to the P2P platform, as well.) Of course, any type of financing comes at a cost, but it’s always wise to do the math, so you know what you’re agreeing to pay for a business loan up front. 

For investors, it’s important to know that P2P investments are not FDIC-insured. Therefore, you may face an added degree of risk with this type of investment compared with other options. At the same time, if the process goes smoothly, you might enjoy higher returns than you’d receive from FDIC-insured CDs or savings accounts. It’s up to you to determine your risk tolerance and how much of your portfolio you’re comfortable exposing to higher-risk investments.

Is a peer-to-peer loan right for you?

If you’re wondering whether a peer-to-peer loan could work for your business, there are a few details you’ll want to consider. First, it’s wise to review your credit reports and scores (from all three credit bureaus, if possible). 

A lender will likely review one of your consumer credit reports and scores when you apply for a P2P loan. Therefore, it’s helpful to know the condition of your credit before you apply for financing. You can access a free credit report from Equifax, TransUnion, and Experian via AnnualCreditReport.com once every 12 months. Through the end of 2023, you can take advantage of free weekly credit report access through the same website. 

Next, make sure you’re in a position to afford a new business loan. If you believe your company might struggle to afford a new monthly loan payment, now may not be the time to seek new financing. 

Finally, shop around and compare P2P loan offers from multiple companies. You may also want to consider other types of small business loans. Comparing different financing offers can help you make sure you find the best deal available for your company. 

Debt financing has long been a preferred financing option for small business owners. It’s true that the majority of entrepreneurs leverage their own money to start or run their business, but those funds often fall short of the ultimate need. In these cases, a business loan gives you more control than you’d get with other routes such as angel investors or borrowing from family members.

However, lenders reject the majority of business loan applications. Rather than letting this reality deter you, it should merely encourage you to put your best foot forward whenever submitting an application. There’s no shame in getting denied by a lender. It happens to everyone. What matters is that you try your hardest and put your business in the best position to succeed.

Here’s a closer look at common reasons loan applications are rejected. Some are easily remedied, while others take more effort. The important thing to note is that none of these factors is a death sentence. If you find that one of them contributed to a rejection, simply make a goal to improve it for your next application. With this focus on incremental improvement, anything is possible.

Here are some of the most likely reasons an application gets axed:

You Botched the Application

One of the biggest contributors to loan rejections is also among the most basic: the applicant didn’t handle the process correctly. This includes leaving sections of the application unfinished, entering incorrect information, or failing to include the required documentation.

You can reduce the risk of this fate by preparing your documents ahead of time. You’ll find it’s much easier to write a business plan or locate your tax returns when you don’t do it the night before the deadline.

Put yourself in a lender’s shoes and it’s understandable why they’re sticklers for details. Because lenders make informed decisions based on the contents of your application, forgetting to complete a section, including erroneous information, or neglecting to send the required documents makes their decision much easier. If you can’t be trusted to fill out an application correctly, how can you be trusted with a large sum of money?

Imagine if a friend asked you to borrow money but had no clear idea what they would be spending it on. That kind of disorganization would probably be met with a polite rejection from you. Most people only loan money to a friend if they trust them and have an idea of where the money is going.

Your Credit Score is Lacking

Credit scores result from an algorithm that lenders use to predict how likely you are to repay the money they might provide to you. The determinants of your score come down to relevant factors such as how promptly you pay your recurring bills and how much of your credit card balance you pay off each month.

Business owners have 2 types of credit to watch: personal and business. That’s right—your business has its very own credit report and credit score from Equifax, Experian, and Dun & Bradstreet, the 3 major business credit bureaus.

A low credit score can stem from a history of late payments, unpaid tax liens and judgments, or high use of available credit. But lenders can also ding you for not having established a long enough credit history.

Just because your score isn’t where it needs to be for one loan doesn’t mean you’re out of luck. Each lender has their own standards and they generally aren’t shy about broadcasting them. So when you see credit score requirements associated with a loan, take them seriously. You’ll save yourself a lot of time by not chasing loans you aren’t qualified to receive.

You can turn around a low score by paying down debt, paying your bills on time, and keeping your account balances low. If insufficient business credit is the issue, Credit Karma recommends taking the following actions to establish a credit history:

• Apply for and use a business credit card.
• Open a business bank account under your business name.
• Get a business phone under your business name.
• Apply for an employer identification number (EIN) from the IRS.
• Register your business with Dun & Bradstreet to get a free DUNS Number.

Taking these steps—and being consistent—can help you improve your business credit score so you can qualify for financing, maybe even at a better rate.

Your Business is Too Green

Every business needs to start somewhere, and there’s no shame in being a young company. It’s actually something to be proud of because it takes determination to turn your idea into a reality.

But many lenders will be understandably skittish when dealing with businesses that lack a track record. The success rates of a company over two years old are much higher and your banker, by his or her very nature, is highly risk-averse. They usually won’t take a risk on a very young company. You should also know that they will likely use your company tax returns to determine how long you’ve been in business. With that in mind, even if you don’t have much to report, file your returns starting with the first year to establish your company’s age right from the start. Your ability to repay your debt is substantially impacted by the amount of money your business brings in, so the more evidence of cash flow you can provide, the better. And for young businesses, this type of evidence is in short supply.

You Need More Collateral

Many small business loans are secured loans, meaning you need to offer something of value to protect the lender in case you aren’t able to make the necessary payments. Assets used for collateral include vehicles, homes, properties, equipment, and retained income.

Lenders prefer borrowers who have skin in the game—assets offered up as collateral, which the borrower would forfeit if they defaulted on their loan. Before you reapply for financing, document all of your personal and business assets, such as equipment, bank accounts, real estate, vehicles, and even accounts receivable, and then decide which you’d be willing to use to secure a loan. As you work through the list, consider your likelihood to default and what the consequences would be if you had to forfeit the assets.

When you lack an adequate asset to use as collateral, you’ll find that lenders are more likely to turn down your applications. While this can be frustrating for borrowers, it makes sense. If lenders always handed out money without guarantees, it wouldn’t be long before they’d run out of it.

Your Cash Flow is Lacking

When lenders want to quickly assess an applicant, they often start with cash flow. Not only does it show the strength of your business performance, but it provides a glimpse into your ability to manage details and stay on top of expenses.

If your business is new, it often lacks the track record needed to instill confidence. The good news is that certain loan options are ideal for newer businesses. Just make sure your business tenure lines up with the requirements for a specific loan before you apply. Some businesses experience seasonal slumps, which is understandable to lenders. What they’ll want to see is that you can balance your financial obligations year-round. Accounting software makes this easier to accomplish by tracking invoices so you can collect payments promptly. Also, this type of software can quickly create cash flow reports for loan applications.

You Went for the Wrong Loan

There are times when a borrower has all their ducks in a row, yet they’ve simply applied for a loan that isn’t a good match for their business. Perhaps your business doesn’t qualify due to its size or structure, or your business plan calls for using the money in ways the lender doesn’t approve.

The point is that your due diligence needs to take into account the nuances of each lender so you don’t waste time applying for a loan that will never be possible for your business.

Banks look at your debt-service ratio to determine whether you’ve got enough cash flow to make the loan payments. To calculate the ratio, take your annual net operating income and divide it by your annual debt payments. Higher numbers are better. You’ll need at least 1.15 for a Small Business Administration (SBA) loan guarantee, and lenders could require a stronger ratio. Next time you apply, run your anticipated loan amount through an online loan calculator to make sure you’re not overreaching.

At the other end, it’s just as much work for lenders to extend a large loan as a small one, but they make more money on the large one. If you’re finding yourself feeling pressured to apply for more than you need just to qualify, consider alternative sources of financing, such as crowdfunding, angel investors, or an SBA microloan.

Your Business Plan is Underwhelming

Many lenders ask for business plans as part of the application process. They’ll review your plan to see how you intend to spend their money, as well as to gauge your organizational and strategic abilities.

Writing a business plan speaks volumes about whether your company is a good investment, and it’s one of the primary tools lenders use to evaluate business loan applications. If yours wasn’t up to snuff the last time you applied for a loan, take the time now to whip it into shape. In addition to descriptions of your company and its structure, your product or service, and your sales and marketing plan, the SBA recommends that you present the following:

• A market analysis
• Financial projections based on your income and cash flow statements, balance sheets, and budgets
• An appendix with documentation supporting your application

Applying for a business loan is never easy, but it’s preferable to letting cash-flow issues keep your company from growing. By shoring up your credit, keeping your requested loan amount realistic, and wowing lenders with a business plan that shows you and your company in the best light, you’ll maximize your chances of getting the funding you need to take your business to the next level. 

Never rush this stage of the application. Your business plan is your sales pitch, as well as your guiding light. If done correctly, it will sufficiently impress the lender so that you can obtain the financing you require. Once you have the money, it will then serve as your blueprint for spending it in the most effective way possible.

Your Financial Statement are Lacking

Not having accurate, informative, timely, accessible, and comparative financial data will hurt your chances if you need to raise money and get a business loan, underscoring just one of the reasons to make sure this part of your business is handled professionally. Here are the most common errors and pitfalls that will hinder your business from raising funds:

Revenue Recognition

Actually “earning” your revenue is almost never directly correlated to when you send an invoice to or receive money from your customers. Each industry has one right and many wrong ways to recognize revenue, and bankers and sophisticated investors will be familiar with each. If you are a software company and the banker does not see that you have an account called “Deferred Revenue” on your balance sheet, for example, they will lose confidence in your ability to run your business.

Gross Margin

There are two main expenses in a business, and they should be separated on your profit and loss statement. Specifically, all expenses directly related to the manufacturing of your products or the fulfillment of your services, also referred to as costs of goods sold or cost of sales, should be subtracted from your net revenue (correctly recognized as mentioned above) to determine your gross profit. Then divide your gross profit into your net revenue to find your gross margin. Many businesses fail to show this separate from the rest of their expenses and net profit before taxes, but it is a number bankers and investors want, and need, to know.

Balance Sheet Reconciliations

Every single account on your balance sheet should be reconciled every month, not just your bank and credit card accounts. This includes a thorough review of your accounts receivable, inventory, accounts payable, payroll liabilities, inter-company loans, and more. You need to be able to explain to a banker or investor what each account represents and even be able to provide documentation, upon their request, to validate the balance reflected on your balance sheet. Too many businesses pay little or no heed to their balance sheet, but investors and bankers know it drives the accuracy of everything you present in your financial statements.

Lack of Metric and Ratio Knowledge

You need to know your numbers, and, even more importantly, you need to know what they mean in the context of your past, future, and industry as well as the perspective of bankers and investors. Bankers care about current ratio, days sales outstanding, working capital days, inventory turnover, fixed charge coverage ratio, and other proofs of your liquidity, stability, sustainability, and wherewithal to pay them back. Investors care about EBITDA, free cash flow, burn rate, and other things dealing with the cash required to grow the business and the potential return their investment may garner.

Your Debt Utilization Raises Red Flags

Lenders will pay close attention to the credit currently available to your small business. If you’re using too much, it could mean you are already stretched thin and might not be able to handle your repayments consistently.

On the flip side, if you haven’t utilized credit in the past, you could be considered a risk because you won’t have a debt track record from which they can base their decision. If you have a healthy amount of credit available and are only using a moderate amount, that puts you in the safety zone. It shows you have responsibly borrowed money in the past and know how to handle the repayments.

You Don't Have Any Income

Unlike an equity investor who will reap the rewards of their investment when a business is either sold or goes public, the first loan payment will likely be due somewhere around 30 days after a business owner receives the proceeds. In other words, if there isn’t sufficient income to make the loan payments, it’s unlikely the lender will approve the loan.

Your Loan Isn't Cost-Effective for the Lender

Don’t forget that it costs money to lend money. So if you apply for a small loan from a larger lender, they might see it as more effort than it’s worth. There are plenty of financing options for small dollar amounts, but you need to make sure you’re approaching the right lenders.

The Best Way to Begin Your Loan Search

Many of the mistakes listed above involve carelessness on the borrower’s part. They didn’t research the lender well enough or they didn’t carefully prepare their application. So pump the brakes a bit and take the time to understand your financial needs and identify the exact amount of money you’ll need to borrow.

According to the SBA, the median small business loan in America is $140,000. And the majority of loans are for less than $250,000. These numbers don’t necessarily mean you should follow the trend and ask for $140,000, but it provides a helpful baseline as you decide on the best amount for your needs. Use our SBA loan calculator to estimate your monthly payment and how large of a loan you can afford.

Another crucial factor is when the funds will be in your account. If you need the money right away, you’ll need to look at a small selection of expedited loans. If you have a more generous timeline, you can probably seek out slower options such as SBA loans (which can take up to 3 months to fund).

How to Recover from a Rejected Loan Application

First of all, don’t get discouraged. Only about 1 in 10 applications for small business loans are approved. It’s incredible (in a bad way) that 9 out of 10 business loan applications are rejected.

Having your loan application rejected is a wake-up call that your credit or business health isn’t as strong as you thought (or hoped) it was. It can be a very demoralizing experience—especially if you were counting on that financing to sustain your business operations.

When a loan application is denied, it can usually be traced back to two explanations: bad credit or a high debt-to-income ratio. Fortunately, both of those things can be fixed with responsible practices and a little patience, making you more likely to get a “yes” the next time. Here are 6 things to do as soon as your loan application is denied.

1. Study your rejection letter

All lenders are required by law to send you a written notice confirming whether your application was accepted or rejected, as well as the reasons why you were turned down for the loan. According to the FTC:

“The creditor must tell you the specific reason for the rejection or that you are entitled to learn the reason if you ask within 60 days. An acceptable reason might be: ‘your income was too low’ or ‘you haven’t been employed long enough.’ An unacceptable reason might be ‘you didn’t meet our minimum standards.’ That information isn’t specific enough.”

Understanding the “why” of your rejection helps you know where to focus your efforts, whether that means paying down your existing debt or building more credit history. So, instead of balling up the letter and tossing it into the trash, turn your rejection letter into your new plan of action so that you can be more credit-worthy down the road.

2. Address any blind spots on your credit report

Ideally, you should check your credit report three times a year, looking for old accounts that should be closed or inaccuracies which could suggest identity theft. But with so much on your plate as a business owner, keeping up with your credit can sometimes fall by the wayside.

That becomes a real problem when your loan is rejected for reasons that take you by surprise. Credit reports don’t just summarize your active credit accounts and payment history; they also collect public record information like bankruptcy filings, foreclosures, tax liens, and financial judgments. If any of those things are misrepresented on your credit report, it can be tremendously damaging to your chances of securing credit.

Whether inaccuracies occur due to malicious act or accident, it’s ultimately up to you to stay on top of your own credit. Access your credit report for free on AnnualCreditReport.com, and file a dispute with the relevant credit bureau (either Experian, Equifax and TransUnion) if you see anything shady on the report they provide. As credit.com advises:

“If you see any accounts you don’t recognize or late payments you think were on time, highlight them. You’ll need to dispute each of those separately with the credit bureau who issued that report. Even if the same error appears on all three of your credit reports, you’ll need to file three separate disputes over the item.”

3. Pay down outstanding balances

One of the most common reasons for loan rejection is credit utilization—the ratio of your current credit balances to credit limits. This is slightly different than your debt-to-income ratio, which divides your monthly debt obligations by your monthly gross income. Both measurements reflect how much additional debt you can afford to take on, so the lower these ratios are, the better chance you have of being approved for a loan.

Being denied a loan due to your credit utilization or debt-to-income ratio means that lenders aren’t fully confident that you’ll be able to make your minimum payments. There’s nothing to do here except take your medicine: put your new financing plans on hold and focus on paying down your balances until your debt-to-income ratio is below 36.

4. Beware of desperate measures

If you applied for a loan to stave off financial hardship, being turned down can create panic that can lead to some very bad choices. Predatory lenders make their living on that kind of panic, and their risky, high-interest loans almost always leave you worse off than before.

Predatory lenders offer financing that is intentionally difficult to repay. Through their extremely high interest rates, unreasonable terms, and deceptive practices, these lenders force desperate borrowers into a “debt cycle,” in which borrowers are trapped in a loan due to ongoing late fees and penalties. Two of the most common predatory loans are:

Payday loans: These are short-term loans with interest rates typically starting at 390%. (No, that’s not a typo.) A borrower provides the lender with a post-dated check for the amount of the loan plus interest and fees, and the lender cashes the check on that date. If the borrower doesn’t have enough money to repay, additional fees and interest are added to the debt.

Title loans: The borrower provides the title to their vehicle in exchange for a cash loan for a fraction of what the vehicle is worth. If the borrower is unable to repay, the lender takes ownership of the vehicle and sells it.

Please don’t go this route. If your loan rejection has left you desperate for money, swallow your pride and try to borrow from friends and family instead.

5. For thin credit, start small

Being turned down for an “insufficient credit file” doesn’t mean you’re irresponsible—it simply means you don’t have a long enough history of credit maintenance and payments for a lender to make a confident decision about your creditworthiness.

While this situation is very rare for established business owners (who generally have years of credit card and vendor account payments under their belts), young entrepreneurs might not have a long enough credit history to secure the financing they need. If that’s the case, you’ll have to go through the motions for a while: Opening a couple of small credit accounts with easy-to-manage payments will prove to lenders that you have your finances under control.

The Consumer Financial Protection Bureau recommends two low-risk options to build up your credit file: Secured credit cards, in which you put down a cash deposit and the bank provides you with a credit line matching that amount, and credit builder loans, in which a financial institution deposits a small amount of money into a locked savings amount, and you make small payments until you come to the end of the loan term and receive the accumulated money.

6. Wait for the right moment

When you authorize a financial institution to check your credit for a loan application, it typically creates a “hard inquiry” (or “hard pull”) that stays on your credit report for two years. This is different from a “soft inquiry,” which is more commonly used in background checks and pre-qualification decisions, and has no impact on your credit. (Some alternative lenders only use soft inquiries during your application and funding process, so it’s important to find out up front if your lender will be performing a hard credit pull, a soft pull, or both.)

Each hard inquiry won’t affect your credit score much on its own, but multiple hard inquiries in a short period of time can be a major red flag for lenders, who may interpret those inquiries as a sign of financial instability or desperation.

When you’re turned down for a loan, your first instinct might be to immediately apply for a loan elsewhere, in order to get a “second opinion.” The problem is, you may be even less likely to be approved for that next application because you’re racking up hard inquiries on your credit report.

Our advice? Don’t apply for another loan until you’ve made significant improvements to your credit and financial health—a process that can take a year or more. The longer you can wait, the better.

Where to Go When the Bank Says No to a Small Business Loan

After you’ve improved your credit and financial health, you’ll be ready to look for financing options again. When looking for a small business loan, whether for expansion, short-term expenses, or any other, you have more options than just checking with your local bank. Banks and other conventional loan providers have certain criteria when approving your loan. They take into consideration many factors such as the time for which you have been in operation, credit scores, the monthly revenue you earn, your business plan, and the collateral you can provide, among others. If you’re unable to meet their conditions, they may not offer you the finance you need. In such a situation, your best bet is to look to alternative or innovative lending institutions such as Lendio to obtain the funds. Here are some of the best options out there.

SBA or Small Business Administration Loan Programs

The SBA has several small business loan programs for small enterprises, intended to meet their finance requirements. While the government does not lend directly to the companies, it works with microloan providers, banks, and other community development institutions. It supports entrepreneurs by laying down certain regulations for the lending procedures.

• SBA 7(a) Loan Program: A very versatile program, it allows start-ups and small businesses to use these funds for buying machinery, tools, furniture, and other equipment, working finances, buying and renovating fixed assets like structures and other property, among others.
• Real Estate and Equipment Loans: You can use the financing provided under this program only for expansion purposes and to buy land, existing structures, developing, renovating, and constructing buildings, and machinery for use on a long-term basis.
• Microloan Program: By way of this program, small business owners cannot buy fixed assets or pay off loans. They can only use the funds as working capital or to purchase small machinery, tools, and other fixtures. You can also buy inventory, furniture, and other supplies you need.
• Disaster Loans: If you’ve lost property and real estate, inventory, machinery, equipment, or any other supplies in a declared disaster, you can use the business loans provided under this program to replace them. This program offers finance at low interest rates.

Alternative Finance Sources

Aside from banks and the SBA, there are many other sources for getting the funding you need. Look around for the many lending institutions that offer you a small business loan without the strict criteria that banks have. They may be open to providing you business loans despite low credit scores, lack of collateral, or insufficient monthly revenues. However, you might have to pay much higher rates of interest and typically, small business loan terms are shorter than those offered by the SBA. Here are some of them:

• Lending Club: You can borrow funds of up to $35,000 from the other members if you have a credit score of a minimum of 650. Other members lend you the finance you need and can earn up to 9% in interest.
• Prosper: The maximum loan amount offered is $25,000 and borrowers with credit scores of a minimum of 640 can access funds. Lenders can provide loans in smaller denominations until the total amount is raised.
• OnDeck Capital: You can access funds from this source if you can prove that you have been in business for a minimum period of a year and have an annual revenue of $100,000. Apply for the business credit you need over the phone or by filling an application form online. OnDeck makes the loan amount available to you within a day or more.
• Communities At Work Fund: if you can meet their criteria and run a non-profit undertaking, this finance institution extends the funding you need. They direct their support to businesses with low-income and communities in the lower wealth category.
• Accion: Depending on certain conditions, you can get financing of a maximum of $50,000 if you have a credit score of at least 525. At the same time, you must prove that in the last one year, you have not declared bankruptcy and have enough monthly earnings to clear your bills and make payments towards your loan.

Crowdfunding Loans

Crowdfunding loans are similar to microloans, and small business owners that cannot access bank finance can make use of them. However, like microloans, you won’t need to pay back the loan amount in cash. Instead, you’ll need to honor the loan obligation in other ways.

• Kickstarter: This institution issues loan products to companies or creative entrepreneurs for expansion purposes. While you’ll remain the owner of the products you create, you’ll need to prove that your enterprise has the total funding to get started. In lieu of the loan amount, you’ll pay in the form of a product or service your company offers. For instance, if you’re planning to open an art academy, you might have to submit saleable art to pay for the loan.
• Indiegogo: The terms and conditions for accessing this funding are similar to that of Kickstarter. However, you don’t need to have the complete start-up finance in hand to qualify for the business credit.

Entrepreneurs and owners of startup companies no longer need to rely on banks to get the business loans they need. Nor do they need to wait for long processing times and submit elaborate paperwork to get approved. Instead, they can contact many other lending institutions and get the small business loan products they need at terms and conditions that are more suitable for their enterprise and its unique needs.

Lendio is a free marketplace for small business loans. Simply answer a few questions about your business and the amount of capital you are seeking. Lendio will instantly match you with loan options from our network of over 50 lenders. Lendio makes it possible to shop for the best business loan options and rates available without having to submit your information to multiple banks and organizations.

With all of these strategies, it’s helpful to put yourself in the lender’s shoes. Their job is to simultaneously fund small businesses and also safeguard their money. It’s a difficult balancing act, and they likely take no pleasure in rejecting applications. You can make things easier for both them and you by carefully preparing each application and ensuring that you’re giving them ample reasons to give you the green light.

If your loan is approved, throw a little party with your friends. If your application is denied, don’t despair. Remember, the majority of loans are met with a hard no. Take positives from the experience by learning from your mistakes and submitting an even stronger application the next time around. This approach ensures you’ll always be progressing and you’ll eventually get the financing your business requires.

Funding is a key part of starting a small business. After securing a loan, you can find an office space, open a storefront, order inventory, launch an e-commerce website, and pay for the services needed to get your small business off the ground. 

Starting and growing your new business doesn’t necessarily mean draining your personal bank account. Instead, look for funding opportunities to supplement your financial needs.

The cost to start and run a successful company varies greatly depending on the business model, industry, location, and the owner’s goals. According to the Small Business Administration (SBA), most microbusinesses with 1–2 employees only need $3,000 to start. Most home-based businesses are launched with just $2,000. 

Obviously, the funding needed to launch a franchise or an innovative tech startup could stretch into the hundreds of thousands, but a lot of small businesses only need a little extra capital to get their business running.

Small business owners looking for funding solutions to cover startup expenses should consider microloans. While smaller in nature, microloans can provide entrepreneurs—especially minority entrepreneurs or those in low-income communities—access to the capital needed to launch their business.

This guide takes a deep dive into microloans and answers frequently asked questions while assessing the value of this financing option. Keep reading to determine if microloans are the right funding solution for your business.

What is a microloan?

A microloan is a smaller loan with fewer stipulations issued to business owners, typically disadvantaged entrepreneurs. A business can use a microloan for a variety of purposes but will have to pay it back faster than traditional loans. 

Microloans typically cover smaller loan amounts with flexible requirements and terms. There’s no set amount for what constitutes a microloan, but according to the SBA, a microloan is any loan amount falling below $50,000. The average microloan amount is around $13,000. However, some organizations issue microloans for a little as $500—especially if they want to support community businesses or help entrepreneurs struggling to secure other funding. 

While microloans are usually available to anyone, some financial institutions will limit applicants to certain demographics. More organizations are specifically developing microloan programs to help disadvantaged business owners access the funds they need but have been unable to receive through traditional financing.

Microloans were built to help disadvantaged business owners.

The modern microloan has its roots in 1970s Bangladesh, where economics professor Mohammed Yunus loaned $27 to local women who wove bamboo stools. Yunus saw how these women were exploited by money lenders and decided to offer a better alternative. 

With his loan, these women were able to buy their own materials and begin selling their stools in their own shops. This small loan helped them launch their businesses, and they were able to quickly turn a profit even as they paid back their loans—helping to break the cycle of poverty and debt.

Yunus went on to start the Grameen Bank Project, which strived to provide funding to poor and disadvantaged business owners. Yunus and his bank were awarded the Nobel Peace Prize in 2006. 

In the modern era, several organizations provide similar services through microloans. In the United States, the SBA offers microloans to qualifying businesses to help them establish themselves and grow. 

Local governments offer small business microloans to foster job growth. Even private organizations have microloan arms that are meant to support lower-income and disadvantaged people. By giving these entrepreneurs the support they need, these microlenders can have a significant impact on communities with minimal capital risks.  

Of course, there are plenty of microloan funding options for business owners who don’t come from disadvantaged communities. However, microloans are rooted in creating opportunities for people with poor credit and limited resources. As many minority small business owners experienced during COVID-relief funding, financing isn’t always equal. Programs like microloans can balance the scales and give disadvantaged business owners access to additional funding.

What's a microloan used for?

Most microloans aren’t limited to a certain type of purchase and can be a flexible way to access the funds you need to open and run your new business. Along with providing a boost to startups, more established businesses apply for microloans when they need to rebuild after a natural disaster or when they want to expand their current operations. Companies of all sizes, shapes, and industries can use the capital from microloans to cover short-term business expenses.

A few examples of common ways small business owners might use microloans include:

• Working capital: this refers to the liquid cash you have on hand to coer daily costs. Working capital can pay for miscellaneous expenses and protect your business if you go over budget for any reason.
• Inventory: a crucial part of many small businesses, from e-commerce stores to local product-based companies. You can purchase items for sale or invest in materials that can be used to manufacture your products.
• Supplies: your supplies can cover everything from safety equipment to office items for your staff. You’re likely going to need to invest more in supplies at the front end of your business but will always need to consider these expenses as you grow.

• Furniture and fixtures: if you have an office or storefront, you’ll need desks, couches, lighting, and other furniture or fixtures to help improve comfort and productivity. You can use a microloan to cover these costs.
• Equipment and machinery: this includes everything from your POS systems to large-scale manufacturing equipment. Like supplies, you will invest more at the start of your business on these expenses, so securing a microloan can give you the capital needed to make these purchases before launching.
• Employee wages: microloan borrowers can use the funds to cover employee wages and salaries. This financial relief can keep your staff covered during a struggling period or while you wait for outstanding client payments.

Some organizations might set restrictions on how you can and can’t utilize microloans, so always review and discuss the requirements with your lender. For example, the SBA states that microloans can’t be used to pay existing debts or to purchase real estate. 

Other microlenders create loans to cover equipment costs or to promote hiring growth, which means you’ll need to use those funds for specific purposes. However, for the most part, you’ll have complete flexibility to use your microloan however you’d like.

What are the pros and cons of microloans?

Like any funding decision, a microloan has pros and cons that could determine whether this financing option is best for you. Just because microlending worked for another organization doesn’t mean it’s right for your needs. Consider a few of the pros and cons of microloans as you weigh this funding option. 

Some common advantages to microloans include:

• Microloans tend to have fewer requirements than traditional loans.
• They usually have lower credit score requirements, which means you’ll still qualify if you don’t have the best credit.  
• They are often approved faster than larger loans, giving you access to necessary funds quickly. 
• They are easier to pay off, which means your business can become debt-free faster. 
• They are less expensive. Smaller loans typically mean lower interest rates, so you owe less on the money you borrow. 
• You may not need collateral. Some microloans won’t require any collateral to prove that you’ll repay the money. 

These benefits have a significant impact on small businesses that need startup funding to open their doors or need a short-term loan to cover emergency costs. However, there are some drawbacks to opting for a microloan. 

Some common disadvantages to microloans include:

• The amount is limited. Microloans are inherently small, which means you may not have access to the full amount needed to make a significant difference in your business.
• The term might be shorter, which means you will need to pay back your loan faster and could have a higher monthly payment than a traditional loan. 
• Some microloans have restrictions on what you can spend the money on—like equipment financing or building remodeling. 
• You may not qualify if you don’t meet certain demographic requirements. Some microlenders support specific demographics (like women-owned businesses), disqualifying entrepreneurs who do not meet those requirements.

As you start to research microlending, consider what amount you’d need to borrow, how you plan to pay it off, and the timeline needed to return the amount borrowed. Answering these questions will help you to determine whether the terms of the loans you find are reasonable and to decide if a microloan is the right option. 

Who issues microloans?

There are several organizations that specialize in providing microloans to small businesses. The SBA is one of the most common sources of microloans, so we’ll start there.

SBA microloan program

The SBA is a popular funding resource for small businesses, and they also facilitate microloans throughout the country. You won’t deal directly with the SBA to apply for and receive these microloans.

Instead, the SBA partners with intermediary lenders—nonprofit community-based organizations with lending and management experience—to review, approve, and distribute microloans to borrowers.

Small businesses looking to secure a microloan from the SBA’s microloan program should know the following details:

• Borrowers will need to contact their local SBA district office to begin the application process.
• Each intermediary lender has its own lending and credit requirements, which can vary.
• The maximum repayment term on an SBA microloan is 6 years.
• The maximum amount a borrower can receive is $50,000.
• Interest rates on the microloan are determined by the intermediary lender but typically fall between 8 and 13%.
• SBA microloans cannot be used to purchase real estate or pay off current debts.

Other microloan lenders

Beyond the SBA’s microloan program, you can also find microloan opportunities from private lenders or nonprofit organizations like Accion USA or Kiva.

To find a lender who can help you secure a microloan, check out the curation lender services from Lendio. You can fill out a few basic forms and compare lenders to see which ones offer the most favorable terms. To start, answer a simple question: how much money do you need? 

If you don’t want to work with a new lender, consult your bank or credit union about their small business funding options. Some banks offer discounts to existing customers, which means you could save by taking out a loan where you already have an account. However, it pays to compare rates, and you could save a significant amount of money by shopping around for loan providers.

What do you need to apply for a microloan?

Preparation is the best way to increase your odds of getting approved for a microloan and receiving your funds faster. Gathering the right information before you start the application process will streamline your approval. 

A few basic items you will likely need for the microloan application include:

• The loan amount you need and what you plan to use it for;
• Your business bank account routing information;
• Your LLC documents and IRS Employer Identification Number (EIN);
• Applicable business licenses; and
• Relevant information about your business (size, employees, annual sales, etc.).

Additionally, you’ll need to be ready for the lender to pull a business credit report and potentially a personal credit report. While you’ll be able to self-report on the application, most lenders will confirm your credit scores on their own. Microloans tend to have lower credit score requirements, but most lenders will still use your credit history to determine your eligibility and interest rates.

Keep in mind that different lenders will set different requirements for loan approval. While this list provides a basic guide for what you should gather, you may need certain documents or statements to confirm your eligibility.

If possible, review the requirements for your microloan before beginning the application process and talk to a lending specialist. They can help you to create a checklist of items to gather before you apply.

The impact of microloans on women and minorities.

Women start firms with about half the capital men do, according to a 2014 study by the National Women’s Business Council, and women-owned firms average about 6% of the outside equity that male-owned firms receive. On top of that, women receive less than 5% of conventional small business loans, even though they make up nearly 40% of all small businesses in the country.

So women are basically killing it in the economy, but they’re not alone. Minority-owned American businesses are growing at a staggering rate. In 2012, minority entrepreneurs owned over 8 million—about 29%—of businesses nationwide. This number was a huge increase over the 5.8 million owned in 2007. Yet many minorities struggle to secure funding due to lower credit scores and fewer collateral assets. The US Department of Commerce found that minority-owned businesses see loan denial rates that are 3 times the national average.

Here we have 2 amazing groups of people who are struggling to find funding for their businesses. Enter microloans. Because microlenders are more interested in fostering growth than they are in making a profit, many choose to focus on bringing their resources to the groups who need them most.

According to a report released by the city of Los Angeles after they approved a new microloan bill, “It is estimated that every dollar loaned to a small business or microenterprise generates approximately $2 of economic activity. As such, the Microloan Program could generate $2,500,000 in stimulus to the Los Angeles economy over the next 5 years.”

Simply put, microloans make the small business world go ‘round.

How you can access microloans.

Because most microloans are designed to help new and struggling businesses, their requirements are much more forgiving. You don’t have to worry if your credit isn’t perfect or if your business isn’t making a million bucks a year. You don’t even have to worry if your business hasn’t been around for a year. Applying for a microloan is easy and stress-free.

SBA microloans

As mentioned earlier, the SBA is all about those microloans, with an average microloan of about $13,000. You can’t go to them directly for the loan, however—you have to go to one of their intermediary lenders. The SBA website has a list of authorized intermediary lenders participating in the SBA’s microloan program. Your results will depend on the state where you live. SBA microloans can be used for:

• Working capital
• Inventory or supplies
• Furniture or fixtures
• Machinery or equipment

Proceeds from an SBA microloan can’t be used to pay off old debts or purchase new real estate.

Repayment terms vary according to the loan amount, planned use of funds, requirements determined by the intermediary lender, and needs of the small business borrower. The max repayment term allowed by the SBA for one of their microloans is 6 years with interest rates varying depending on the intermediary lender.

SBA loans can be a great way to get a good rate on a small loan, but they aren’t the only option for your small business.

Marketplace lenders offer competitive small business loans.

That’s right, marketplace lenders like Lendio offer loans similar to microloans. Though our lenders wouldn’t technically call any of our financial products microloans, we offer loans as low as $500.

Best of all, you just have to fill out our short 15-minute application to get the process started. You’ll start by telling us the amount of money you want—anywhere from $500 to $5 million. You’re probably not looking for millions just yet, but a microloan can help you get there.

Microloans lay a foundation for your growth.

Whether you’re a startup, in a rough financial spot, or just need extra cash, any amount of money can help. $500 can purchase a new piece of software that will streamline your workflow. A couple of grand can get you a shiny new laptop to draft your new book or edit your first YouTube video.

There are certain things microloans probably can’t help you with—like covering your entire payroll, buying a new property, or hiring additional staffers.

However, microloans can become a critical financial tool for your small business.

To give you a better idea about how these funds can help you grow your business, here are 5 common ways small business owners like you use microloans.

1. Working capital

Working capital is the money a business needs to finance its day-to-day operations—like covering utility bills, getting supplies, buying inventory, and paying for an employee appreciation party.

Cash is the lifeblood of every business. Yet many businesses struggle with cash flow, which makes it hard for them to cover run-of-the-mill expenses with any sense of urgency. For example, a recent study by PricewaterhouseCoopers found that the average company takes 68 days to pay its creditors.

With a microloan on hand, you have a reserve fund to dip into to cover working capital expenses. Not only can this help you reduce debt, it can also help you avoid late fees.

2. New equipment or tools.

Often, a simple investment in new equipment can go a long way toward increasing productivity. For example, if a company is still using an old-school cash register and managing accounting by hand, it stands to benefit tremendously from moving to a more modern solution.

You can use a microloan to invest in new equipment or tools that deliver rapid ROI. For example, if you run a company where employees are spread out and working in the field, investing in a collaboration platform like Slack to streamline communication can help your entire team work more efficiently, increasing profitability.

3. Launching a new service.

Let’s say you run a local restaurant that’s been a staple of the neighborhood for some time. For years, loyal customers have been begging you to launch a food truck business so they can grab tasty treats elsewhere across town. You always liked the idea, but you just didn’t have the capital to make it all happen.

All of a sudden, a used food truck practically falls into your lap for a price that’s too good to refuse, and you’re finally ready. You just need a little bit of extra funds to finance some other food truck startup costs.

A microloan can help you here, too. With access to these funds, you can give your truck a tune-up and paint job, buy cooking items, and start your new culinary adventure.

4. Attending a conference.

One of the best ways to grow your business is by attending a relevant conference or trade show that’s specific to your industry. Not only can this help you learn new things and stay on top of the latest developments in your field, but it can also help you land new clients.

Paying for a conference, however, can be tricky. Conference tickets can be expensive, and you may also have to pay for lodging, travel, and food costs, among other incidentals.

A microloan could help here, too. Use the funds to cover your conference-related expenses. If all goes according to plan, the skills you learn and the contacts you make will more than offset this spend.

5. Marketing your business online.

In the age of mobile devices and ubiquitous connectivity, how can you expect people to find your business if you don’t have a robust web presence?

Microloans can help you pay for online marketing initiatives. For example, you might decide to invest in content marketing, pay for sponsored posts, or advertise your business on Google and social media. Microloan amounts should be enough to launch test campaigns or boost important company news.

What are some alternatives to microloans?

If you decide that microloans aren’t the best option for you, there are other funding alternatives to consider. These options can provide the same flexibility and similar funding amounts to microloans. Consider what’s available to you and whether these choices are better for your business. 

• Business credit cards. Like a personal credit card, a business credit card lets you spend money on anything you want. Your credit provider will set a limit for how much you can spend, but you can keep charging the card as long as you stay below that limit and pay it off. Credit cards have several benefits—namely their cashback rewards—but they might not be available if you have poor credit. They also might have annual fees and high interest rates that drive up their costs. 
• Crowdsourcing. Crowdsourcing is the ultimate microloan. Instead of seeking a lump sum of money from 1 person, you ask many to give you a few dollars each—like asking 200 people for $10 to raise $2,000. Websites like Kickstarter are popular for small businesses to raise funds, and you might not even have to pay the loan back. However, crowdsourcing is unpredictable, and you may not get all the funds you need if your goals aren’t met. 
• Peer-to-peer lending. P2P lending is like crowdsourcing, but it tends to occur on a larger scale. Through P2P sites, investors and entrepreneurs can donate a few thousand dollars as a loan that you’ll pay back once your business starts to grow. Like crowdsourcing, the main drawback is that you don’t know if people will want to loan money to you. You might also have to follow strict repayment terms.   
• Small business grants. Grants are like loans, except you don’t have to pay them back. Some local governments and nonprofit foundations offer microgrants to small businesses to help build up their communities. While these grants are free, they often require a complex application process because so many companies apply for them. Plus, you may need to use the grant for specific projects—like investing in clean energy or job creation.

At Lendio, we have several business funding choices for your needs. Learn more about equipment financing, merchant cash advances, and other ways to secure small and large amounts of money to start your business.

Let us help you secure a microloan.

If you only need a few thousand dollars to launch your new business venture or help cover inventory costs, then a microloan might be right for you—especially if you’re a marginalized business owner. These smaller loans are a great way to get the working capital you need without taking on a lot of the risk or financial burden that comes with larger funding options.Whether you hope to secure $500 for a short-term upgrade or need a $50,000 investment, our team at Lendio is here to help you. Use our guides to research different funding types and opportunities for small businesses. You can find a potential microlender or an alternative option to increase the cash flow of your business.