All businesses, no matter the size, will seek additional financing at some point in their lifespan. With so many options to choose from, it can be difficult to find out what type of funding best fits your small business.

Fortunately, we’ve created this guide to help you start researching ways for your business to get some extra capital. In over 10,000 words (or 28 pages), we’ll cover online lending, how to apply for funding online, how to apply with less than stellar credit and various types of funding options.


What is online lending?

In its broadest sense, online lending is any kind of loan that’s not directly from a traditional bank. A number of online lenders are often referred to as an online lender because they are an alternative to a traditional bank.

Historically, the term has been used to include credit unions, government loans and other credit that’s structurally similar to bank loans but comes from or through a different source.

Today, those older loan styles are considered part of the traditional lending market. They have the same terms, use the same criteria for approval and fall in the same regulation category. By contrast, alternative lenders:

  • Come from institutions not traditionally part of the financial industry (a number of them are technology companies).
  • Use different methods to communicate with clients.
  • Base rates and approval on metrics other than your FICO credit score and similar traditional measurements.
  • Apply a different (frequently streamlined or automated) approval process compared to traditional lenders.

These changes come with some marked advantages for borrowers:

  • Options for getting a small business loan are wider and more varied, equating to more competition for rates and wider choices for borrowers.
  • The streamlined process allows for faster access to working capital, which is more useful during a fiscal business emergency.
  • New metrics make lending available even to individuals and businesses with a bumpy credit history.
  • Smaller institutions are making loans, meaning businesses can borrow smaller amounts without paying a premium.

Online lending is not a monolithic type of loan that stands in opposition to the mostly monocultural traditional lending options. It’s a catch-all category for everything that isn’t the traditional model, with as many varieties as there are ways to imagine lending money. Some of the most common and successful models include:

  • Lines of credit
  • Peer-to-Peer programs
  • Factoring
  • Merchant cash advances
  • Working capital loans

Each type of online lending is more or less appropriate for a given business’ situation (don’t worry; we’ll break these down further in the guide). The most valuable part of the online lending revolution is that you now have more options than ever before.

In this age of identity theft, cyber criminals, scams and misleading internet ads, it’s only prudent to have concerns about the security of any internet transaction. Because of this, some business owners may avoid online lending because they worry about the legitimacy and safety of these internet finance companies. Certainly, business owners may have even more concerns than average consumers.

It’s fair to say that the best online lenders do focus on the security of their customers and applicants, but some lenders might not be as safe as others. As with any other business decision, it’s only prudent to do some due diligence before selecting an online lending company. As a business owner, how can you make certain that your online lender provides a secure service and actually provides the loans that they advertise?

Are online lenders safe?

How to find safe online lenders

Before you apply for an online business loan, you should do some research on potential lenders. The internet gives you the tools to apply for a quick loan, and it also enables some quick research. These are some tips to help you evaluate the security of any online loan application that you might consider.

1. Look for a physical address: A platform lender might operate online, but a legitimate financing company will display a physical address in a prominent location on their website. For example, you can visit the Kabbage contact page to learn that this online lender has an office in Atlanta. It’s simple enough to verify this address with a quick Google search. Your search should uncover all sorts of press and information about any credible company.

2. Research third-party verification of the lender: You can also check the lender’s website and other sources for third-party verification. For example, you might check the Better Business Bureau for a listing and rating. Some online certification organizations, like TRUSTe, review sites and award seals if the company meets security and privacy standards. You can learn more about TRUSTe here. Online loan companies that go out of their way to seek third-party verification have demonstrated the value they place on earning trust.

3. Look for reviews from other business owners: The reality is that you can’t use reviews to totally inform your opinion. For one thing, people are more likely to post a complaint when they are dissatisfied and simply move on when the service has met their expectations. Another major problem is that reviews can be faked either by competitors or supporters of a particular organization. Still, you can review comments that others have made about an online lender to help guide your further research into the company.

4. Check the website’s ownership: You can perform a WHOIS check within seconds. This will tell you who owns the site and how long the site has been around. This can give you insight into the actual nature of the organization that runs the site and if they are truly an online business lender. If you have any questions about this registration information, go ahead and contact the lender to ask about it.

5. Be wary of lead gatherers with no real loans: One of the biggest threats to privacy may not come from actual cyber criminals but simply from aggressive lead gatherers. Very often, these lead sites disguise themselves as business lenders; however, the actual intention is simply to gather information to sell to any number of lenders around the country. In order to safely and privately access the funds you need, you’ll probably want to start at the actual lender and not a lead gatherer.

Why consider safe, online business lending?

Legitimate online lenders know that their business success hinges upon their own reputation for keeping their customer’s information secure and private. These companies take steps to protect their own business and that of their customers and applicants. Obviously, this is the type of finance company that you would want to do business with either online or offline.

Online lenders may provide the right solution for your business. Some benefits could include fast or even instant online decisions and very quick funding. For many business owners, an internet lending platform can be a much quicker and more accessible solution than traditional banks, small business credit cards and other funding sources. If you do your own due diligence and choose a secure lending platform, you’re likely to be satisfied with your decision to borrow from an internet lender.

A history of online lending

Certainly, online lenders may have disrupted the loan industry recently. However, they mostly used financial technology, often called fintech, to improve upon lending models that have existed for centuries.

According to historians, formal lending dates back at least as far as Ancient Rome. Still, it’s likely that informal lending has its roots in the dawn of human history. Most likely, the first loans were personal loans between individuals. These personal loans are not so different than the peer-to-peer lending made possible by P2P lending platforms today.

Then

The main source of commercial lending used to be banks. The only “alternative lenders” were credit unions, which used the same metrics and processes as banks, but offered slightly better terms. A combination of stricter regulation and fewer opportunities made the small business loan landscape lack in variety.

Now 

Three things happened in rapid succession at the start of the 21st century:

  • First, the internet made it possible for small businesses to reach audiences that were previously out of their reach.
  • Second, deregulation of banking and lending opened doors to organizations that couldn’t make loans legally.
  • Third, a pair of business models sprang up so quickly and successfully that they got national attention.

These models were:

  • Payday loan outfits, which offered short-term loans until the end of a pay period. They proved that smaller loans using different lending metrics for approval could be a successful model.
  • Microlending, a term for providing loans as small as $20 to businesses in developing nations, was invented. This won its creator, Mohammed Yunus, a Nobel Prize in economics, and demonstrated that lending via the internet worked.

Things happened rapidly in the landscape built, or maybe just exposed, by that sequence of discoveries and changes.

Fast-forward to 2015, and the small business lending landscape is very different from what it was at the turn of the century. Alternative lending is a booming business and a source of real opportunity for entrepreneurs whose traditional credit profile or specific business needs match poorly with the traditional lending process.

The Earliest Examples of Online Lending

Online lending in the 20th century

It usually takes a long time for borrowers to qualify for mortgages. By the mid-1980s, Quicken Loans introduced a more rapid loan process to the market. The company found that they could speed up loan processing by transferring a lot of application and review steps from paper to computers. Since the internet wasn’t as prevalent with consumers as it is today, this first online lending business had limits.

At the very end of the 20th Century, First Internet Bank emerged. Consumers could apply for a loan from their home or office computer, and they didn’t actually have to visit a bank or speak with a loan officer. Online banking did not replace traditional banks, but it motivated those traditional banks to put their own online banking in place.

Alternative, online lending in the 20th century

It was not just banks and other finance companies that noticed online lending. Very soon, all sorts of entrepreneurs thought up ways to use the internet to provide accessible loans to the growing number of online consumers. Very often, people think of peer-to-peer lending platforms when they think about online, alternative loans for consumers. It’s true that P2P lenders have become popular, but they aren’t the only source of financing.

  • P2P lenders

The first major P2P lending site began in 2006. This kind of platform serves as a sort of middleman between borrowers and individuals who hope to invest in loans. Lending platforms like these usually limit the size of loans to fairly modest amounts, but they might make both borrowing and lending more accessible than banks and finance companies can.

  • Online small business lending platforms

P2P lending sites attracted a lot of attention but limited loans to several thousand dollars. Therefore, small business owners may not find these loans suitable for their company’s financing needs. There’s where online small business lending platforms stepped in. Online lenders that can offer loan amounts ranging from a few thousand to up to $250,000. Businesses may be approved and use these funds rapidly.

In addition, these internet business lenders can use many different sources of information about a business to qualify borrowers. Some businesses may not have established a great credit score yet. With an online lender for small businesses, companies can demonstrate their creditworthiness with data from payment processors, online retail platforms or company checking accounts.

The future of online lending

In contrast to traditional lenders, online lending platforms can offer speed and transparency. In some cases, the efficiency of operating online helps some of these lenders approve borrowers who might not qualify for a loan from a bank or similar lending institution.

People conduct all kinds of business transactions online that they used to perform in person. This includes shopping, paying bills, researching business decisions, and of course, applying for loans. As both consumers and business owners grow more comfortable with conducting business over the internet, online lending is also expected to continue to grow.

The internet allows you to shop for groceries, read the news, check in on your friends and manage your personal finances, all from the comfort of your home. However, while all the tasks on that list are relatively easy, if you’ve never applied for a loan online, you may be wondering what that process involves. Here’s are five aspects you need when applying for funding online:

  • Find the right lender.

The online marketplace contains a vast range of loans and lenders. You may apply for installment loans, credit cards, small business lines of credit and many other types of loans from banks, merchant lenders and fintech lenders. Your choice depends on:

  • The type of loan you want
  • The funding speed you prefer
  • Your personal credit score
  • Your overall business’s health
  • And several other factors

With traditional funding, you can often start the application process online but may have to follow up in person. If the loan is for your business, you need a business plan that includes future earnings projections as well as information on your number of employees, industry trends and your personal credit-worthiness. The whole process can take weeks to complete.

If you opt for a credit card, you can complete the entire process online and receive acceptance or rejection immediately. The creditor uses your personal credit score to determine approval, and if your application is approved, receiving the card can take a week or longer.

Finally, online lenders offer an application process that may not be centered around your credit score. Rather, these companies use data to create a picture of the overall health of your company. The approval process takes seconds, and funding often happens within a day. In most cases, the minimum requirements include being in business for at least a year and meeting a certain revenue threshold.

  • Compare loan terms.

Once you’ve found a lender or narrowed your options, it’s time to start comparing terms. The cost of a loan is measured in its interest and fees. If the loan charges interest, remember to look closely for fees such as origination fees, early repayment fees or late payment fees. Then, determine how much it is going to cost to borrow the money you need over a year’s period. Finally, compare that amount to the cost of other loans you are considering.

  • Gather application materials.

Before you open a bunch of tabs and start entering details to apply for a loan online, gather the information you need. If applying with a traditional lender or a credit card company, pull your credit report to check on your score and review it for accuracy. If you need to submit a business plan with the loan application, run it past a consultant to boost your chances of approval.

Conversely, if applying for a loan through an alternative lender, be prepared to share information from your online accounts to create a snapshot of your credit-worthiness, your business’s general health, your cash flow and your business performance. In most cases, you sign into your online accounts such as:

  • PayPal
  • eBay
  • Amazon
  • Etsy
  • Xero
  • Intuit QuickBooks
  • And more

 

  • Determine if you can handle the repayment schedule.

Whether you apply for a single loan or multiple loans at the same time, you don’t have to accept the loan if you don’t want to. First, review the repayment terms closely and be honest with yourself about whether or not you can afford it.

Credit cards often require monthly minimum payments that are only a percentage or two of the balance. While this may be affordable, paying only the minimums can lock you into debt for decades.

Conversely, installment loans and lines of credit often require more substantial monthly payments, and while these may be harder to pay, the larger payments ensure your business doesn’t stagnate in debt.

Finally, some merchant lenders allow you to repay loans using a percentage of your incoming credit card sales or revenues. This option is appealing to many small business owners as it pairs payments with revenue, but for others, it cuts too harshly into their available working capital.

In addition to payment amounts and timing, also consider late fees and other costs when determining whether or not the loan works with your budget.

  • Accept the loan and start growing.

Once you’ve closely reviewed the options and selected the right one for you, it’s time to accept the loan and start growing. Ideally, whether you work with a lender who requires a business plan or not, you should have a plan for the funds. That keeps you in control and ensures you don’t overspend on a whim.

With online lending, you’re not on your own. Many online lenders offer online chat or phone support while you fill out the loan. Additionally, these lenders have designed their application processes to make them as straightforward as possible. But what happens if you’re worried about your credit score?

Applying for funds with less than stellar credit

Having less than perfect credit is a reality for most Americans. And having bad credit often times can hinder us from reaching our full potential. However, because our economy has recently been climbing back up, having bad credit doesn’t hold as big of a stigma as it used to. Whereas before getting any type of loan with bad credit was basically impossible, now bad creditors are not completely out of luck. They will just have to work a little harder to receive the funding they need.

Having poor credit is a huge roadblock when it comes to getting a loan because lenders do not view you as a viable investment. In fact, they view you as a risk that might default. So, how hard is it to get a small business loan?

Although traditional lenders like banks and credit unions hold pretty closely to this idea, there are many great alternatives popping up to make the loan application process friendlier to all small business owners. Try these two out:

  • Get a co-signer

You can still try to get a loan from a bank if you have bad credit only if you also have someone to guarantee your loan. If you have a good friend or family member who really believes in your business, he or she can co-sign your loan, essentially taking on the risk. You need to remember that if you are unable to pay your loan, the payments will fall onto your co-signer and will affect their credit, as well.

  • Collateral

If you do not want to burden any family or friends to co-sign your loan, you can always put up collateral to get approved. Some lenders are more likely to approve your loan if you pledge something valuable like your home in case you cannot pay off your debt. However, this is very high risk.

When looking into how to get a business loan with less than stellar credit, be very wary of payday loans and research lending options. Learn about all the types of loan options available to you and know the difference between a secured and unsecured loan.

Going into it, expect to have to work harder for approval and to have higher interest rates than someone with great credit. It is also good to meet with all your lending options so that you can be fully informed. Now that you understand the steps, it’s time to start looking for the right lender for your situation.

How to use your funds

With a strategic plan, you will be less likely to waste the opportunity to put the funds to work for your business. As you develop your plan, consider these 11 ways you can use your small business funds:

  • Purchasing inventory

One of the most common reasons that business owners pursue a loan is to purchase inventory. Most businesses need a significant amount of inventory to keep their companies running smoothly, and this can sometimes be difficult, especially if your business is just getting started or experiencing unusual demand. Using a small business loan to buy inventory is a great way to help you respond quickly to consumer demand, prepare for peak shopping seasons and set yourself apart from the competition. Three industries that require a lot of inventory are retail, restaurants and construction businesses.

  • Investing in equipment

Unfortunately, small business owners are not always prepared financially when a piece of equipment breaks down and needs to be replaced. Other companies may put off growing their business because they do not have the funds to purchase the necessary equipment for expansion. A small business loan can help companies get the funds they need to upgrade, replace or purchase more equipment. Three of the industries that can benefit from equipment loans the most are transportation, energy and telecommunications, as these industries often require the use of expensive equipment.

  • Hiring staff

Whether you are ready to hire your first employee, or you need to bring on additional staff to help meet growing business demands, hiring staff is a considerable investment. According to the U.S. Department of Labor, bad hires and employee turnover can ultimately end up costing your business 30 percent of its yearly earnings. Instead of bargain shopping for your next employees, you can use a business loan to get the initial funds that you need to hire the right candidates.

  • Building a website

In today’s digital marketplace, it’s nearly impossible to compete without having an attractive website that is easy to navigate and use. What many new business owners may not realize is that the cost of building a killer business website goes beyond just buying a domain. In addition to domain and hosting costs, there are also fees involved with using a drag-and-drop website building service like Wix or utilizing premium themes in a do-it-yourself platform like WordPress. If you plan to hire a professional, web development services can range anywhere from $1,000 to $100,000 depending on your needs. A business loan is a great way to cover these startup costs for your website.

  • Developing your marketing

Though having an effective website is important, you still need to market your products or services. If you are planning on handling your marketing in-house, there are a variety of marketing tools for small businesses that can help you promote your business online and off. Many businesses also choose to focus on their core business and outsource their marketing to a contractor or agency. These marketing costs can all be covered with a small business loan.

  • Covering operational expenses

When business is slow, or if companies find themselves dealing with unexpected costs, you may sometimes need help covering day-to-day operational expenses like utilities, accounting or even paying staff. A business loan can help you get the funds you need to keep things running smoothly in the meantime.

  • Expanding your business

Fifty-nine percent of small businesses apply for funding in the hopes of expanding their businesses or taking on opportunities. There are many costs to consider when expanding your business. In fact, many of the uses for a business loan that are outlined above are expenses that you might incur while trying to grow your business. Whether you need to buy more inventory or equipment, hire more staff or expand other aspects of your brand, a business loan can help give you the initial capital that you need to take your business to the next level.

  • Managing cash flow

Cash flow describes the process that a company receives and disburses funds. The way that you manage the money that enters and leaves your business can be the difference between success and failure. Obviously, you need to meet payroll, keep the utilities turned on and pay for your site’s lease or mortgage. Over and above the basics, you also need access to funds that can help you exploit opportunities to grow profits.

If you have access to quick funding from an online lender, you won’t have to turn down a new opportunity just because you lack available cash in your bank account. If extra training, a piece of modern equipment or a larger inventory order would contribute to your bottom line, a line of credit can provide the solution.

  • Weathering unexpected problems

Running a business includes confronting a series of risks. Some threats to your company could reduce your income or increase your costs. Very often, the way that companies can manage risks determines their success and, in many cases, their longevity. No matter how well you plan, unexpected problems arise from time-to-time. If you have to close because of foul weather, one of your employees wrecks the company car or some other unanticipated problem arises, you could find your business strapped for ready cash.

Without the resources to fix or even wait out some problems, your very profitable and solid business could even fail. When you know you can always draw upon a line of credit or another kind of financing, you can enjoy peace of mind.

  • Improving your business’s credit-worthiness

Traditional finance companies want proof that your company manages debt well. If your business never borrows money, it’s tough for you to establish yourself as a good credit risk. Alternatively, you could develop a plan to manage your credit.

After that, use funds from an online loan for sound business reasons that help you increase your profits. Once you establish a good history of making prompt payments and managing credit well, you’ll become a more attractive customer for all kinds of lenders.

Once you can confidently show lenders that you can manage loans well, you’re going to find that the cost of funding gets cheaper. This means that you can use borrowed money to profit even more. Very often, those first loans get used just to demonstrate that you know how to manage loans. If they also help you increase your profits, you’ll know that your credit management plan was sound.

  • Leveraging expertise

Business owners also use lines of credit to access the advice and training of experts in their fields. For example, if you have a sales team and you determine that they would be more successful with a new script and a new approach, you may decide to hire a sales consultant to help you draft the new script, train your sales staff and implement the program.

Similarly, if you decide that new software would speed up your business processes and lower expenses, you may decide to use your business line of credit to hire a software consultant to help you choose, install and use the software.

Once you have decided exactly how you plan to use the money, it is time to do some research on your options for small business loans. Remember, traditional lending is not the only way to get the money that you need to start or expand your business. Alternative lenders offer flexible funding options for a variety of industries including:

  • Retail businesses
  • Hospitality businesses
  • Construction businesses
  • Auto repair businesses
  • Beauty salons and spas
  • Medical businesses
  • Dental businesses
  • Restaurants
  • Wholesaling
  • And more!

Now that we’ve covered how to apply for and use additional funds, we’ll break down the different types of funding available.

Lines of credit

A line of credit is an amount of credit extended to a borrower. Getting a business line of credit is an important way for business owners to get access to an ongoing source of funds to help manage cash flow, pay bills and otherwise maintain the daily operations of their company.

Keep in mind that a business line of credit is a business loan that is intended to help small businesses meet their short-term cash needs. Essentially, a business line of credit helps small businesses grow by giving them an ongoing source of funds to tap into when needed.

There are four types of lines of credit, which can be mixed and matched (i.e. you can have a secured/unsecured revolving/non-revolving line of credit):

  • Revolving

A revolving line of credit means you can borrow from the credit account and add to your balance (within a certain limit) as often as you need it. After borrowing from your line, you’re required to make monthly payments to repay your outstanding balance. You can borrow more money as long as you’re within your limit. Each withdrawal has the same loan terms and is considered one loan, rather than multiple independent loans.

  • Non-revolving

A non-revolving line of credit acts similarly to a revolving line of credit in that you must repay what you borrow. With a non-revolving line of credit, your funds may or may not replenish when payments are made. If your funds don’t replenish at all, you have a non-revolving line of credit. However, if each withdrawal comes with its own separate loan terms, you can see your line replenish as you make payments. This is still considered a non-revolving line of credit because although your line replenishes, each withdrawal is independent of one another.

  • Secured

Secured lines are loans that are secured by your assets. What that means is that you put up some kind of collateral to qualify for funding. This is riskier for your business but not as risky for the lender. Secured lines can offer lower interest rates, better terms and even larger lines. However, if you default on the loan, you lose the assets you put up for collateral and can hurt your credit.

  • Unsecured

Unsecured lines are loans that are riskier for the lender because you don’t put up collateral for the loan. Unsecured loans can offer higher amounts, additional flexibility due to higher funds and can help you build a relationship with lenders. However, they come with additional costs, can come in shorter loan terms and may come with higher interest rates.

Pro-tip: To avoid having to run up a balance on your business line of credit, add to your business savings whenever possible. By building a financial nest egg, you’ll be less vulnerable to cash flow shortfalls and will reduce your need to borrow.

Business lines of credit vs. loans

Many business owners want to know the differences between a business line of credit and a traditional financing. The distinctions are subtle, but each one offers certain advantages, and it’s important to take these into consideration when deciding which financing option is best for your business. Here are two key differences to keep in mind:

  • Interest rates: Traditional financing offers generally fixed rates. Lines of credit interest rates are usually tied to the market’s variable rate.
  • Payment structure: Traditional financing has set amounts due each month until the loan is paid off entirely. With a line of credit, payment varies from month-to-month depending on how much funding used the previous month.
  • Flexible borrowing: Lines of credit allow businesses to borrow as much or as little money as they need at the time (within a certain credit limit). Traditional loans only offer one fixed amount.

How to get a line of credit

There are a few things you need to have in place before applying for a business line of credit. Here are the top six tips to get a line of credit:

  • Build good credit history from the very beginning of your business.

When most small businesses get started, it’s often a challenge to maintain positive cash flow. Even if you are making lots of money with your product or service, most of that money often is going right out the door to pay for operational expenses, inventory, payroll and general business upkeep. This makes it important to build a good credit history for your business.

  • Do your research.

Check out a few different banks or lenders online to find out their loan terms and compare interest rates to find a good deal on a line of credit. If your credit is less than stellar, consider platform lenders who often make it easier for business owners to get approved for financing even if they have less than perfect credit or have not been in business for very long.

  • Demonstrate a positive cash flow.

In order to get an unsecured line of credit, your business must be able to demonstrate positive cash flow. Your entire business performance will be under review. In addition to your credit history, lenders will consider your past, present and projected future earnings to determine if you qualify for a business line of credit and if so, how much you will receive and at what interest rate.

  • Don’t max out your personal or business credit cards.

As tempting as it may be to use your credit cards for business expenses, be careful! For one thing, maxed out credit cards do not look good to potential lenders – they will hurt your credit score, reduce your ability to get approved for loans and raise your cost of borrowing. And second, consider the extraordinarily high rate of interest you’ll be paying on the credit cards.

  • Start small.

If your credit isn’t great, start small and take whatever line of credit the lender is willing to give you, even if it’s smaller than what you actually need. Make your payments on time or better yet – early (some lenders even offer no early payment fees). As you gradually begin to build your credit history in a more positive direction, you can ask for a larger line of credit.

  • Apply when you don’t really need the money.

The best time to get a business line of credit is when you don’t really need one. Sounds silly, right? But it’s true. Lenders (both traditional and online) are generally more than willing to loan you money when your cash flow is strong, your numbers are great, and you’re not in desperate need of a loan. You might not think you need a business line of credit, but it’s actually great because you’re in strong position to pay it back immediately. With lines of credit, you don’t have to pay until you take funds. Getting a line of credit when your cash flow is strong can help you with any unexpected funds in the future.

Why a line of credit can work for your small business

Lines of credit are good solutions for businesses with a variety of ongoing business needs and cash flow fluctuations. Most online lenders offer:

  • Quicker turnaround times
  • Flexibility of funds
  • Online applications

Applying for a line of credit is similar to traditional funding, with a few exceptions:

  • Financial statements: Both lenders need financial statements to see your business’s story. These are also important for you as a business owner, so you can know how much you can afford and not overextend yourself.
  • Credit score: Most online lenders look beyond this. They want to see your overall business performance, not just a number.
  • Connected accounts: Connecting your business accounts (like your business’s checking account, PayPal, Etsy account, etc.) can help lenders learn more about your business.

Working capital loans

Working capital loans are a great way for businesses like yours to generate capital and to start becoming laser-focused on business growth.

A working capital loan is a specialized loan type that is granted to businesses and designed to meet the everyday financial needs of running a business. With working capital loans, your small business isn’t required to submit the loan’s purpose to the lender during the application process. Typically working capital loans aren’t used to purchase assets or for long-term financing. They’re used for short-term business financing needs.

Types of working capital loans

Working capital can come in various forms. Here are some to consider:

  • Bank credit line
  • Short-term loans
  • Funding via personal resourced (HELOC, P2P or family loans)
  • Factoring or accounts receivable financing
  • Trade credit
  • Equipment loan or lease financing

No matter the type, working capital is calculated by subtracting your current liabilities you’re your current assets.

Current Assets – Current Liabilities = Working Capital

The advantages of working capital loans

  • You are prepared to handle any financial difficulties that may arise.

Under the best of circumstances, poor working capital leads to financial pressure on a company, increased borrowing and late payments to the creditor – all of which result in a lower credit rating. A lower credit rating means banks charge a higher interest rate for any money borrowed. Applying for and using a working capital loan when you need it most will keep you in business when shortages occur.

  • You can and will maintain ownership of your company.

If you were to receive funding from an equity investor, you would likely have to give up a generous percentage of your company in return. In turn, you are giving up a portion of your decision-making ability as well. But, if you borrow funds from the bank or another financial institution, you are obligated to make the agreed-upon payments on time. But that’s the end of your obligation to the lender. You can choose to run your business however you choose without outside interference.

  • There’s no collateral required.

Working capital loans come in both secured and unsecured forms, although many are unsecured. Unsecured working capital loans are given only to those small businesses that have a very good credit history and/or have little or no risk of default. If you’re lucky enough to qualify for an unsecured loan, you won’t need to put up your business, inventory or anything else to secure the loan.

  • They offer shorter terms for short-term problems.

Working capital loans are designed to help with infusing money into your business for the short term: a hiccup here, a blip there and a needed cash injection too. You won’t have to plan for years of monthly payments to pay back what you borrowed.

  • You can use the money however you see fit.

Banks and lenders have few if any restrictions on how you use the money. They just want you to use the money to maintain your operations or to do things that will increase your opportunities for revenue. That works out well because as a smart business owner, that is exactly what you want to do with it too.

  • They can be quick.

Applying for a typical business or personal loan can take up a lot of your valuable time and may not even end in approval. What’s the point of going through excessive paperwork, a lengthy approval process, putting up collateral, personally guaranteeing the loan, making fixed monthly payments and having restrictions on how you use the money if your request is just going to get denied? Working capital loans allow borrowers to access money almost immediately, usually within a week after the application is accepted.

The disadvantages of working capital loans

  • You need to consider repayment.

Yes, you actually have to repay the loan. This is usually a given when you borrow money. As with any type of loan, your sole obligation to the lender is to make your payments. Unfortunately, even if your business fails, you’ll still have to make these payments. And if you are forced into bankruptcy, your lenders will have a claim to repayment before any equity investors.

  • Some collateral may be required.

Some working capital loans will require some degree of security for the lender. The guarantee may be something like a factory, home, inventory or even jewelry. These items can also be given as a guarantee even if there are existing mortgages on them.

  • There are higher interest rates.

As many working capital loans are unsecured, they usually include higher interest rates than secured business loans. This means your business will pay more over the life of the loan than it would have paid for a secured loan of the same amount. Unsecured business loans are also harder to qualify for. If your business has a poor or nonexistent credit history, the lender may not approve your application.

  • There are potential impacts on your credit rating.

It might seem like a good idea to keep taking out loans when your small business needs money, but each loan will be noted on your credit rating. And the more you borrow, the higher the risk to the lender, and the higher interest rate you’ll pay. Also, slow payment and no payment will be direct hits to your credit rating, so be sure you will be able to pay back any money you borrow.

  • There are short terms.

Yes, this is both a benefit and a disadvantage based on your business needs. A major disadvantage of getting funds from this type of loan is the fact that the funding is only intended for short-term solutions. These loans will not suffice for long-term business goals or comprehensive business projects that will need higher investments with longer repayment terms.

Factoring, or accounts receivable financing, is a process of selling your accounts receivables to a financing company for immediate cash. It’s typically a cash flow management tool and used by businesses when other financing options aren’t available.

To better understand factoring, let’s put some numbers in an example.

Suppose for a moment that your small business has $110,000 in receivables. If you decide to use receivables financing by working with a factor, the factor will advance funds to you at a certain percentage of the total amount of your outstanding receivables. This amount often ranges from 75 to 80 percent and is based on a variety of factors including the age of a receivable and the quality of the receivables.

Basically, the factor evaluates how likely your customers are to pay their bills. For example, if you have big corporate customers with good credit like Costco or Walmart, then the percentage of advance funds that the factor gives you for your receivables will be higher.

If your customers are mostly small businesses or consumers, the percentage of advance funds might be lower since these receivables are often seen as a lower quality in terms of likelihood of receiving prompt payment. The factor then assumes the risk of getting paid for your receivables, and once the receivables are paid off, you will get the difference between the face amount of your invoices and the amount that the factor kept in reserve (that 10-25 percent of your total receivables), minus the fee for the factoring company.

The advantages of factoring

There are many benefits of receivables financing for businesses of all sizes in a variety of financial situations. Here are five advantages:

  • Fast cash

If customers are slow to pay their bills, your business might need to look for other ways to cover your expenses during a cash flow crunch. So, if raising cash is an immediate need and you’re having difficulty getting sufficient funds through other means, accounts receivable financing can be an effective option. With accounts receivable financing, you can often receive cash within 5-to-10 days, and sometimes even faster, within 1-to-2 days.

  • Freed up working capital

Accounts receivable funding can quickly free up some working capital, so you can use it to buy more inventory and grow your business. You don’t have to worry about missing a great deal on inventory if you have cash ready and waiting. Or you can use the instant cash to generate growth by hiring another salesperson who will bring in more business, spending money on marketing to reach new customers or buying a piece of equipment that will accelerate production.

  • Time saved

Accounts receivable financing can save you time and effort that would otherwise be spent on collecting money due from customers. Since most factoring arrangements will include the process of obtaining the money from customers, it’s one less thing you will have to worry about. Outsourcing your accounts receivable management to another company frees up your resources to focus on other more productive (and lucrative) activities such as selling.

  • No collateral required

A business factoring loan is a type of unsecured financing, so it won’t require collateral from your personal or business assets. Most business owners prefer to avoid putting their house, car, inventory or place of business as collateral for a loan. So, keep the things that matter most, and get your much-needed infusion of cash from a funding source that doesn’t require them.

  • Retained ownership of your business

Another option for business finance is to raise capital by selling equity in your business. But many small business owners do not want to give up ownership (or even partial ownership) of their business. Often small businesses and startups have to rely heavily on outside investors in order to keep running and growing. While this might seem like a good idea, it does force you to give up a percentage of your company ownership each time you go back for more funding. With receivables financing, you’ll retain sole control of your company while still getting the capital you need to operate.

The disadvantages of factoring

While there are a large number of benefits to factoring your accounts receivable, there are also some potential drawbacks to using this method to finance your business. Make sure that you educate yourself about these seven potential downsides and risks of accounts receivable financing before committing your business to this type of financing.

  • Stigma

Some business owners feel like there is a certain stigma that goes along with accounts receivable financing. The stigma comes from the sense that some people might think that if your business is relying on receivables financing, it’s a sign that your company is struggling. There might also be some confusion for your customers – because if you sign up for accounts receivable financing, your customers will be notified when the factoring company takes over your receivables. When customers hear that they will no longer be paying you, it might make them think (unfairly) that your company is having cash flow problems or is at risk of going out of business. Be sure to communicate up front and be proactive with your customers to explain the situation and assuage any doubts or fears that they might have. Reassure your customers that you are in business for the long run.

  • Loss of control

While receivables financing does not affect the ownership of your business, you may have to give up some control of certain business processes. For example, the factoring company could tell you that you have to stop doing business with a particular customer or group of customers because of a poor credit history or rating.

  • Cost

As a savvy business owner, you know that financing of any type is never free. While it may be necessary to have immediate access to cash, obtaining cash using receivables financing may come at a higher price than loans. Factoring companies usually keep between one and four percent of a receivable as their fee. Additionally, they charge interest on the cash advance, typically at least the prime rate plus a percentage or two. While the costs of accounts receivable financing might not seem like very much on a month-to-month basis, if you look at the full picture of what you pay for receivables financing, it can add up to more than 30 percent in annual interest.

  • Contract length

If you decide that accounts receivable financing is for you, you’ll enter into a contract with a factoring company. Unfortunately, the length of your contract may not be as short as you would like. Some of the receivables financing agreements can be quite lengthy — up to two or three years in some cases. That’s not always the best thing for businesses. But the market has been changing and shorter contracts are now becoming more available and acceptable. Make sure you negotiate the contract length with your factoring company.

  • Rate is based on your clients

Receivables financing is unique because instead of being judged based on your own business’ credit, your access to a business factoring loan is based on your clients’ credit. Like any business, you have your share of good and bad clients. If your business has an unfortunate number of slow-paying clients or has some clients with less than stellar credit, keep in mind that these aspects of your client base can affect the discount rate that you pay to the factoring company. If the factoring company finds that your clients are unreliable or do not meet their standards, you may also receive a lower percentage of cash up front. Your clients’ poor creditworthiness or uncertain payment history might even cause you and your business to be ineligible for receivables financing.

  • Factoring companies are not collection agencies

Receivables financing works in some ways that are similar to selling debt to a collection agency, but it’s not exactly the same. If one of your clients doesn’t pay their outstanding balance by a predetermined date or if they fail to pay altogether, this will likely increase the total cost you owe to the factoring company, in addition to adding to your current workload. Before you consider a business factoring loan as an option for a cash advance, make sure you are aware of your clients’ payment histories.

  • Certain factoring could be illegal

Factoring is a legal process. But depending upon the type of business you’re operating, you may be getting into a gray legal territory. For example, consider a business that’s selling products online. If your accounts receivables show billing for items processed but not shipped, it could potentially be fraud. Always be certain that what you’re considering is both ethical and legal.

P2P (peer-to-peer lending)

Peer-to-peer, or P2P, lending has created a financial revolution over the last several years by eliminating the middleman in loan transactions. With P2P lending, you can take loans directly from other people or businesses.

Both the borrower and the lender benefit from peer-to-peer loans. The benefit to the people making the loan is that they create steady income via interest payments. This interest often exceeds that which can be earned via traditional means like CDs, saving accounts and money market funds.

However, P2P lending is not without its drawbacks. The lenders rely on a complex matrix of approval criteria to determine risk, and there is the possibility that the new risk models may not be as accurate as believed.

On the borrower’s side, to compensate lenders for the risk of lending money, the quantity of interest charged for peer-to-peer loans may be higher than traditional prime loans. Here are eight things to keep in mind with P2P lending.

Your guide to peer-to-peer lending

  • Peer-to-peer loans match investors and borrowers.

With peer-to-peer lending, borrowers don’t submit an application to a bank or other financial institution. Instead, they create a profile on a website, and that acts as their application. Investors then review the online profiles, and if they like what they see, they offer a loan to the applicants.

  1. Borrowers have a choice of loans.

Borrowers are not required to take out any of the loans which they are offered. Rather, they can review the terms and interest rates created by various investors, and they can determine which one they prefer. If they don’t see a loan that works for them, they don’t have to take one out. In the P2P lending world, this is referred to as the auction process.

  • Credit scores and debt-to-income ratio are factors.

If you decide to apply for a peer-to-peer loan, the P2P platform creates a profile for you which includes information about your credit score and debt-to-income ratio. Every P2P lender does this slightly differently. For example, some lenders may show applicants’ credit scores, while others may assign ratings such as A, B or C to borrowers. Don’t worry: Although profiles are public so that investors can see them, they don’t contain your real name, ensuring your privacy and security.

  • However, P2P lending can also look beyond credit scores.

However, while credit scores can play a big role, the application process looks past them. While creating your profile, you also get to explain why you need a loan, and this part of the application can be critical to attracting a lender or investor. For example, an investor who sees an enticing application may be more likely to loan to that applicant than to another applicant who doesn’t have a clearly defined purpose for the loan, regardless of whether or not the second applicant has a better credit rating.

  • Peer-to-peer lending does not leverage data like many online lenders.

Although peer-to-peer lending uses technology to connect borrowers and lenders, it does not leverage data in the same way that fintech lenders do. The data varies based on the type of loan the applicant applies for, but it may include stats from sites such as eBay, Amazon, PayPal and countless others. In addition, these companies can also collect data from the applicant’s QuickBooks software. All of this data creates a much more accurate picture of the borrower than a simple profile on a P2P site does.

  • The application process is longer than some loans, shorter than others.

Applying for a peer-to-peer loan is arguably faster than applying for a business loan through a bank, especially because borrowers don’t have to create lengthy business plans. However, P2P applications take longer than applying for loans from online lenders, and they can take longer than applying for a credit card online, as well.

  • Approval and funding times can vary.

With many online lenders and even with online credit card applications, a decision can be rendered in just a matter of seconds, and for online loans, in particular, funding can happen the same day or the next business day. With peer-to-peer loans, approval and funding times vary. Because borrowers have to wait until an investor becomes interested in their profiles, the process can take anywhere from a few minutes to a few days to a few weeks.

  • Investors receive better rates but less security.

Investors who want to put their funds into peer-to-peer platforms have the opportunity to earn interest, and in almost all cases, the nominal rate of return exceeds that of savings accounts, money market accounts and Treasury Bonds. However, if you lend money over a P2P site, your investment is not guaranteed as it is with these other investment vehicles.

Now that you understand basic information about peer-to-peer loans, let’s take closer at what you need to know to get one.

How to get a P2P loan

  • It’s important to realize that a peer-to-peer or social loan is a real loan.

Some borrowers wrongly assume that since the loan is not from a bank or other traditional lending company, it is not an actual loan. Therefore, one can default without penalty.

However, nothing could be further from the truth. Legally, a P2P loan is the same as a bank loan. Not to mention that the primary peer-to-peer lending sites are highly regulated by the SEC, as well as at the state level.

  • Be ready for a unique approval process when applying for a peer-to-peer loan.

The peer-to-peer lending platform will request an application which is either approved or denied based on the lending criteria of the particular platform. If your peer-to-peer loan is approved, the loan request is placed on the platform for investors to fund the loan.

  • Make certain that peer-to-peer lending is available in your state.

Lenders are regulated at both the state and federal level. Although additional states have legalized peer-to-peer lending, not every state allows every platform.

For example, Lending Club loans are not available to borrowers in Iowa. Prosper is not available to borrowers in Iowa and West Virginia.

  • Be aware of the fees.

As you know, loans have more costs than just the interest rate. Many borrowers have been fooled by a very low-interest rate combined with high loan fees. Don’t fall into this trap. Fees for peer-to-peer loans are often high to support the platform’s development and infrastructure.

Of course, the worse your credit rating with the lender, the higher the fee charged by peer-to-peer lender platforms. Fortunately, you do not need to pay the fee out of your own pocket; it’s deducted from the loan amount.

Peer-to-peer or social lending is a good alternative for some borrowers, but it’s critical to keep in mind that these loans have the same legal ramification as any other loan. Next, there is a unique approval process that takes into account hundreds of data points, unlike traditional lenders. Finally, be aware of the fees which can be quite high from peer-to-peer lenders.

Merchant cash advances

When things are going great, businesses have the cash flow they need for success and growth. During lean times or tight transitions, though, your company may need to find a cash advance loan to keep the doors open or to successfully expand. Though a myriad of funding options exists, merchant cash advances and platform lending are two of the most popular and advantageous options.

The trick is understanding the difference between the two. Each has its own unique characteristics and is more or less appropriate for a specific business need.

Let’s start with definitions:

  • What is a merchant cash advance (MCA)?

A merchant cash advance gives a business up-front cash and takes payments from the credit card receipts on a regular (often daily) basis according to an agreed-upon amount. If you’ve been in business for more than a year, you’ve almost certainly received at least one phone call offering you merchant advance funding.

  • What is a business loan?

A business loan also provides up-front cash but is paid back in monthly installments. These are usually withdrawn directly from your operations account, but terms are flexible if another method works better for your business.

Now that we’ve defined MCAs and business loans, here are six differences between the two:

  • Lending structure

Merchant cash advances aren’t technically a loan because of how the payments are structured, meaning they aren’t as regulated or carefully watched. This doesn’t automatically mean that merchant advance funding comes with abusive interest rates and contracts, but it does mean you should read and understand that contract as completely as possible.

  • Approval process

Merchant cash advances approve any business that shows a history of credit card receipts sufficient to pay the money back. This makes them attractive to companies with new or bruised credit histories.

  • Speed of funding

Most MCAs work at the same speed as online lenders – but not always. Ask about this if you go with merchant advance funding and need the money quickly.

  • Payment process

Merchant cash advances take a percentage of credit card sales until the loan is paid. If your company needs flexibility that matches performance, a merchant advance might be the right option.

  • Interest rates

MCA operations don’t typically publish their interest rates. However, factor rates typically range from 1.2 to 1.5 percent (based on risk assessment).

  • Other costs

Merchant cash advances often include set-up fees, processing fees and even payment fees that can as much as double the actual cost of the loan.

MCAs, like anything else, have their pros and cons. Here are six positives and three negatives to acquiring a merchant cash advance.

The advantages of MCAs

  • Get cash fast

One of the biggest positive factors for small or online businesses when considering merchant cash advances s is getting the cash quickly. In fact, some cash or capital can be delivered to the business within hours of submitting an online application. This is good news for business owners who simply don’t have the time to wait for long processing that is typical of many banks and larger lenders.

  • Little-to-no paperwork

Everything is done online. So, there’s no lengthy paperwork to fill out, fax, scan or mail. This decreases your wait time and increases your turnaround time.

  • Repayment isn’t a fixed monthly amount

Repayment may be easier over time. This may work in the business’ favor, particularly if sales are slow at first because payments are based on a percentage of sales, rather than a fixed monthly amount.

Pro-tip: The amount of your loan, or advance, will be based in large part on prior credit card sales. Do your homework and come to the table prepared to show current and prior sales so you can know the terms of your loan completely.

  • High approval rates

This is good news for struggling small business owners who may have been turned down for traditional loans by banks and other lenders. High approval rates from companies offering merchant cash advances mean higher chances of securing the capital you need.

  • Perfect credit isn’t required

As the economy takes dips and swings from high to low, the effects are felt largely by the small business owners. These effects can include dwindling markets, low sales and, worst of all, bad credit. Companies that offer MCAs offer a lump sum of money in exchange for future sales, so they can approve these advances with little basis or consideration of poor credit scores.

  • No collateral required

The approval of the transaction is based on the businesses past credit card sales. So, if your sales are strong, you stand a good chance of being approved for a cash advance.

While there are many benefits to consider about pursuing a cash advance, there are some things to be aware of as well. As a business owner, the decision is always up to you. Only you know what makes sense for your business and what will propel your business forward. With that in mind, here are three major things to consider regarding a cash advance.

The disadvantages of MCAs

  • Higher interest rates (in some cases)

Be sure to thoroughly review the terms of repayment so you know exactly how much you’ll be responsible for repaying.

  • Unregulated industry

This segment of the lending industry is not regulated – again, because their repayment terms are tied to future credit card sales. This is why it’s critical to do your homework.

  • Fees

Companies that offer merchant service cash advances can charge a variety of different fees. Ask your provider upfront so you can make the best decision for your business.

How to get a merchant cash advance

Again, you can use a merchant cash advance for a variety of reasons, including:

  • Your business is new and will not qualify for traditional financing.
  • Your credit rating is too low to qualify for traditional funding.
  • You do not have enough assets to provide as collateral.
  • You are only seeking to finance on a short-term basis.
  • You need or prefer flexible repayment terms that allow for lower payments on slow business days.

So, if you decide an MCA is the right fit for your small business, it’s time to apply. Applying for a merchant cash advance is a fairly straightforward process that typically includes a streamlined application and simplified paperwork.

The idea is to provide borrowers with cash as quickly and with a few hoops to jump through as possible. In many cases, businesses obtain access to their cash within days of applying. Here are three steps to apply for a merchant cash advance:

  • Make arrangements for collection from a qualified credit card processor.

A merchant cash advance is funded based on your perceived ability to repay the money you borrow. In order to qualify, most funding companies will require that you have an account with a processor who is contracted with your merchant cash advance company. If you currently work with an approved company who already contracted with your funding provider, you can move on to the application process. If not, you may need to establish an account with a credit card processor on your funding company’s approved list.

  • Complete and submit your application.

Compared to traditional funding, a merchant cash advance application is very simple. You’ll be asked questions about your company, including the income you generate, your average credit card sales and how long you have been in business. The baseline for qualification varies between different merchant cash advance companies. While you may not be able to fund a startup with a cash advance, you may be able to easily qualify for a merchant cash advance after just a few months in business and a few thousand dollars in average monthly credit card sales.

  • Read and sign the contract.

This is one of the most important parts in the application process. A merchant cash advance is not a traditional loan, so it’s not subject to the strict regulations that commercial bank loans are. Before signing your name, make sure you understand what you’re agreeing to. Traditionally, an MCA specifies that you are:

  • Selling future credit card receipts at a discount in exchange for cash today.
  • Subject to penalties if you default on the terms of your contract.
  • Agreeing to provide a specific amount of your daily credit card sales as repayment to the funding company.

In exchange for a streamlined application and approval process, a merchant cash advance often comes with a lot of fine print, including complicated terms that even the most credit-savvy business owner might have trouble understanding. It’s essential that borrowers carefully read the conditions and stipulations within the contract, including the total cost of the loan’s fees, interest, applicable penalties and other expenses.

5 Tips On Getting an Industry-Specific Loan

Industry-specific loans can provide you with working capital when you need it. Because these loans are specially designed for the unique needs of your industry, they often involve a more streamlined application process, better rates of approval and a product that is simply more effective for your needs. However, even when applying for an industry-specific loan, there is always a chance of being turned down. We’ve compiled a list of tips and guidelines that will help set you up for success.

5 Tips on Getting an Industry-Specific Loan

  1. Write an industry-oriented business plan.

When you write a business plan for a general banker, they often only understand the overarching themes and may not have a distinct understanding of industry jargon. However, that is different when you are applying for an industry-specific loan. The loan officers looking at your documents likely understand your industry inside and out, and as a result, a business plan that truly explains your goals and how they fit into your industry can boost your chances of approval.

  1. Share industry-specific data.

Some industry-specific lenders don’t even require a business plan. This is often true of fintech companies who use different criteria to evaluate the creditworthiness of lenders. For example, instead of providing a business plan, a three-month cash flow estimate and a number of other forecasts, you may simply share a lot of data about your company or your personal finances. This data can vary from lender to lender, but it can also be affected by your personal preferences as well as the apps or programs you use.

When deciding which information to share, consider sharing data that is unique to your industry. For example, if you run an ecommerce shop and you’re applying for a loan for retailers, you may want to share your data from your payment processor, ordering software or inventory records. Alternatively, if you are building up a service-oriented company, you may want to share data about consumer reviews — as those reviews can be an important indicator of your future success.

  1. Figure out how much you need.

Even if your lender doesn’t require a business plan, you should write a business plan for yourself. It should detail what you want to buy and how you expect those investments to affect your long-term sales and revenue. Try to be as exhaustive and detailed as possible when outlining your financial needs. If you forget necessary expenses, you may not borrow enough money. That can prevent you from having the working capital you need.

  1. Offer to put up collateral.

Whether you are applying for an industry-specific loan or another type of business loan, you may be able to improve your chances of success by putting up collateral. The collateral you select can vary from buildings to equipment to inventory, and it may even include personal assets.

In particular, with industry-specific loans, you may want to put up collateral that is relevant to your industry. For example, if you own a restaurant with an expansive wine cellar, you may offer to use that as collateral, or if you own a software company, you might use a trademark or a piece of intellectual property as collateral. In many cases, a general lender may not understand the value of these types of assets, but an industry specialist may be willing to jump on the opportunity to use those types of niche items as collateral.

  1. Do some comparison shopping.

If possible, don’t just apply for the first loan you find. Even in the world of industry-specific loans, there can be a lot of competition, and if you want to find the best product for your needs, you should do some comparison shopping. Look at the cost of the loan in terms of interest and fees, but also look at the application process. Consider how time-consuming it is, what information you need to provide and how easy the application is to navigate. You can even apply for more than one loan and then choose the winner based on which option has the best terms.

How to Use A Sense of Community To Access Better Business Funding

This section was contributed by Patrick Foster, an e-commerce consultant and marketer with 10+ years in the industry. Patrick is currently writing as a side project whilst building passive income. He loves to create content for entrepreneurs and business owners that helps them succeed and live their dreams.

Sometimes it takes a whole village to run a business, and you probably feel like some days you need a dollar from every villager to keep it going! Accessing better business funding isn’t just a case of stringent research and business plans, though those do help; it (literally) pays off to get involved in the community around you. Whether you’re an e-commerce start up on the hunt for product advocates, a burgeoning tech company with a cool app or a local cafe-bakery — working with and for the local community can help you find better funding opportunities. Here’s how.

Find your business value proposition

The best businesses are those who are focused on the people and communities they serve. Take FreshBooks: They make every single new staff member, even the CFO, spend their first month working under customer service reps on the frontline. This experience is then fed into FreshBooks marketing, finances, product development, etc. This kind of commitment to customer service is a powerful research tool as FreshBooks executives are never far from the customer service coalface and the beating heart of their user base. A similar commitment to customer research pays off with a mature and well-rounded business strategy. A strategy that’s focused on customers is much more likely to thrive.

  1. Are you going to save people time, money or trouble (or all three)? Be clear on how your business serves people in order to justify your existence. Focusing on your value propositions will help you write better business loan applications as well as help you grab headlines for the right reasons.
  2. Value proposition-led advertising is a great way to get company press releases and ads in front of the right people. By focusing on what you can offer people, rather than simply what you sell, you can gain powerful PR traction. By raising more awareness of what you do, you will be able to increase turnover and qualify for more competitive business loans.

Talk to local investors

Speaking to investors in your area is a great way to find out more about what issues and causes motivate them. Working with investors isn’t for every business, but talking to interested parties in your local area can help you pinpoint potential growth opportunities.

  1. Listen to people’s reactions to your pitch and business plan and take their feedback on board. Other people’s opinions, especially investors’, are worth their weight in gold in the beginning. However, it can be hard to get distance from your business idea during the early days — you can’t always trust your gut or friends and family when it comes to commercial decisions.
  2. Finding investors in your local area often starts with business networking and contacting local groups. These places are a source of invaluable finance and business information. You can find out how other similar businesses got funded and what grant, loans and support groups are available to you.
  3. Staying local be a great way to start your funding journey and maximize the power of personal relationships, your existing connections and personal brand. Some investors are specifically looking to invest in the local area and will be especially interested to hear from local business owners. They may want to support a specific part of the city or the school you went to.

Serve the needs of a certain group of people

Being everything to everyone isn’t a good idea for your business. You need to niche down and focus on a specific community or user group instead. By being more specific about which community you want to serve, you can streamline your business and build it around your best customers.

  1. In terms of business loans, it can pay off to focus on your industry. Speak to the local movers and shakers in your niche, and don’t forget the power of online communities too.
  2. Focus your product and service offerings around a core set of features and benefits, and don’t try to diversify or grow too soon. Make sure you make the most out of what you do best, and spend time in your customer community to find out more about what motivates them to buy from you.
  3. There are a ton of forums and groups out there, full of useful advice and help for business owners and start ups. Whether you use them for customer research or product validation, make sure you are seen and heard in the right places.

Be visible in the community

Making noise about what you do is a great way to pick up fruitful partnerships and funding opportunities. By making yourself open to collaborations and conversations, you will have first pick when other businesses and organizations come scouting for opportunities.

  1. Service exchange is a great way to get useful things for free from other small businesses. Could you maybe do a skills swap with a video agency? Or a service exchange with a local printers? These are great ways to spread costs and help other growing businesses too!
  2. Being visible can be done in a variety of ways: from putting up flyers and networking to social media and online forums. Reaching out to people is all about integrity and tenacity. Get good at writing emails and use a small business CRM like Insightly to help you manage community outreach.
  3. Communities have their own rules, some of them unwritten. Make sure that you spend time listening to others and contributing to projects — don’t just go barging in asking for business funding or introductions.

Empower staff to be community advocates

Sometimes the best ideas don’t come from board level but from grassroots actions executed by dedicated staff members. A great way to find out about funding opportunities and serve the community is to encourage staff to get involved in local events, groups and culture.

  1. As a business owner, you can’t be everywhere at once. Use your team to help you take your community outreach to the next level.
  2. As a business, get involved in your team members’ communities and projects. Leverage their networks and individual personal brands for a stronger business standing. The best businesses use collective effort to build a community around shared values and beliefs. Dedicating business time to staff projects makes people feel valued.

Community-led business funding

Crowdfunding has changed the ways that businesses seek funds, and it can be a legitimate way to supplement more traditional business loans. Though crowdfunding rarely replaces traditional funding due its ‘all or nothing’ nature, crowdfunding does open up the playing field for innovators and creators.

  1. Crowdfunding is all about trust. You need to have a super credible brand, a great idea and clear messaging to get people want to spend money with you. Remember, people are buying into your business idea and your business as a brand as much as they are investing in what you actually sell.
  2. Solving specific problems for specific customers is a funding tactic that translates well into crowdfunding. Walnut Studio is a perfect example of a small business (run by a husband and wife team) that found funding success thanks to a very clear niche offering. Their quality, handmade leather bike accessories make life easier for committed cyclists who want to look stylish. These Oregon entrepreneurs found fame and fortune on Kickstarter, moving their e-commerce operations from Etsy onto a dedicated store built with Shopify — a typical example of how e-commerce businesses scale, moving from marketplace to dedicated store once cash flow allows.
  3. Don’t believe all the crowdfunding hype. It’s still hard work, and it’s definitely not ‘no strings attached’ money. This crowdfunding advice from a few years ago still rings true: Don’t run off and start signing up for funding sites without a strategy.

You don’t have to be a social enterprise to use the power of community. It’s out there for all businesses to enjoy! Look at how you can use your local community, as well as online communities, to better serve customers and run a more agile, competitive business. What’s the one thing you’ve learnt about your community in the past few years?

Choosing a financing solution can be one of the hardest decisions you face as a business owner. We may not be able to tell you which financing option is the right one for your business, but we can help you identify the differences between various financing options. Taking the time to compare your options helps ensure the decision you make does not become a burden in the future.

 

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Constantina Kokenes

Constantina is an SEO & Content Specialist at Kabbage, a fully-automated online lender for small businesses. She holds a Master’s degree from Northwestern University. She has been featured in The Huffington Post and 360 Advertising Weekly.
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