At some point in their business career, most business owners are forced to use their personal assets (credit cards, savings, investments, home equity loan, etc.) to provide working capital to fund their business. If you've been in business for any length of time, you can probably relate.
If you've ever found yourself needing access to additional capital quickly for your business, you probably know that there’s plenty of business funding advice available on the web. However, there are times that it can be difficult to determine the difference between misleading information that can harm your business and insightful and accurate information that can help your business.
So whether you're in need of a quick infusion of capital now or just want to be prepared for a future need, here’s a rundown of the key factors we share with business owners that ask us for expert business funding advice:
Know the Difference Between Alternative Funding & Traditional Bank Loans
When deciding where to get your loan, there are two overarching types of funding to explore. Therefore, let’s first examine the differences between traditional and alternative financing.
Traditional Bank Loans
Most of the business owners we speak with, share their frustration with both the process and results of obtaining traditional bank financing due to the many restrictions listed above. Because these options seem so different, it's important to decide which route bestfits your specific situation:
When does a bank loan make sense for your business?
When you have excellent credit, valuable collateral, qualify for all bank guidelines, and have weeks or months to wait for an approval, banks offer the cheapest money available.
When does alternative business funding make sense?
When you have the ability to grow or strengthen your business with an infusion of capital. And when you need access to fast business funding quickly and easily, or when not having access to financing can cripple or hold your business back.
Here are some examples of when not having capital can cost you BIG money.
- Losing an opportunity to purchase inventory or equipment at a discounted rate.
- Not being able to bid on a big project or customer because you don't have the tools or staff to effectively fulfill delivery of your products or services.
- Inadequate cash-flow (receivables vs payables) during slow periods can cause you to lose valuable employees, be put on C.O.D. with venders and damage your reputation in the business community.
- Not being able to expand, or purchase equipment to meet a greater market demand than you can fill.
- Not having the capital to invest in lead generation, advertising and marketing campaigns.
- Lack of capital for needed repairs or renovations.
Don’t Borrow More Than You Need
You’d be surprised how many times we’re asked to repeat this advice, because it’s not what most business owners hear when they speak with a firm in the alternative lending marketplace. On the contrary, most firms head in the opposite direction: they want business owners to borrow as much as humanly possible (and maybe a bit more!), because it means more fees and profits for the lender.
However, our proven experience on this is clear: business owners are much better off by only borrowing what they need for their current or imminent working capital needs. That way, they minimize the repayment obligation and give themselves maximum flexibility.
Then, as long as their loan is in good standing (which is usually the case since they've kept their payments small and manageable by not over-borrowing initially), business owners can add to their loan with additional funding. It’s really that simple.
Beware of Early Repayment Penalties
Banks and many firms in the alternative business funding marketplace impose hefty fees for business owners who want to repay their loan early. The reason for this is simple: lenders want to maximize their profits, and early repayment doesn’t support that objective. As noted by NerdWallet: “Some small-business loans come with a prepayment fee for paying off the loan early, adding to the total cost of the loan. This fee is typically represented as a percent of the total remaining loan balance; for example, 1% of a $10,000 remaining loan balance results in a $100 fee.”
However, if a business lending firm tells you that “early repayment penalties are standard in the industry”, then take it from us: this is not true! There are many lenders that never penalize clients for opting to repay their loan early so they can save interest costs. Repaying your loan early might be in your best interest, so don't partner with a lender that would penalize you for doing so.
Don’t Deal With A Middleman
When researching working capital loans, remember that not all lenders are what they appear to be. Many are actually brokers (middlemen and women) that charge up-front fees ranging from a few hundred dollars to a few thousand. In return for these fees, they promise to take care of the loan application, and to use their contacts to find you a lender.
Let’s look at the safety and effectiveness of this strategy. As the chart above shows, the application process with an alternative lender is extremely easy compared to applying for a traditional bank or SBA business loan. The loan application should only take about 10 minutes to complete. And the approval process is a matter of hours or days instead of taking weeks or months with traditional lenders. So there’s really not much value in having an intermediary fill out a simple application for you.
Additionally, when you provide a broker with your business and personal information, they “shop” that information across the country to find you a lender. Most business owners are understandably protective of their information and would prefer to deal directly with a lender of their choosing. Also, because one lender might pay a higher commission to your broker than another, you may end up with an inferior or more costly loan because of that financial incentive.
Another very important consideration when dealing with a broker is the potential liability to your credit score. Each time one of their potential lending sources reviews your application and runs a credit check, it can adversely affect your credit score with the credit bureaus. Which in turn can not only raise the cost of your loan with the lender you end up receiving funding from, but also affect other unrelated future loans and car insurance rates etc.
The Bottom Line
Now that you're prepared with lending advice from the business funding experts, you should be equipped to obtain the funding you need from the right source! Remember to always ask questions and work with a lender you trust to provide the best loan for your business.
For more information about why you should avoid a conventional bank loan, download our FREE eBook: