Business loan

Three Small Business Loan Alternatives

Banks and credit unions tend to offer the most affordable business financing, if your business can qualify. Only a fraction of small business loan applications are approved, and this disparity is growing.

According to the Federal Reserve’s 2022 Small Business Credit Survey, approval rates for both small and large banks declined from 2019 to 2021. Among small business owners who received at least some of the financing that they researched, small banks approved 8% fewer applications in 2021 compared to 2019, and large banks approved 15% fewer applications in the same time frame.

However, many business owners still need capital to cover day-to-day expenses, especially as they continue to face economic challenges such as supply chain disruptions and rising inflation.

If you can’t get a traditional bank loan, you may be looking for other ways to finance your business. Here are three options to consider.

Also see: 7 Money Lessons from Experienced Entrepreneurs on the Best Ways Your Small Business Can Spend and Save

1. Online lenders

Online lenders can offer a variety of small business loan types and generally have more flexible requirements than bank lenders, although the cost of borrowing is usually higher.

And while banks and community financial development institutions can feel the pressure of economic shifts — like the Federal Reserve raising interest rates — alternative lenders are generally filling the gap in the market, says Josh Palkki, director of the credit from Founders First Capital Partners, a San Diego-based small business lender that provides revenue-based business financing and advisory services.

Alternative lenders are less likely to feel the same pressure as bank lenders or to change their internal processes and methods for evaluating business loan agreements, Palkki says. These lenders may be less skittish as they generally charge higher interest rates than conventional lenders.

Many online business lenders offer streamlined application processes, and some can provide funding in as little as 24 hours. To find the right lender for your needs, you need to consider factors such as the types of loans offered, eligibility criteria, speed of funding and customer service, as well as interest rate and fresh.

Also see: As Gasoline Prices Hit $5 a Gallon, IRS Makes Mileage Deduction for Fuel Costs More Generous in Rare Mid-Year Move

2. Business subsidies

For free financing that you don’t have to repay, small business grants may be a good option. Business grants are available from federal, state, and local governments, as well as private corporations.

You can browse thousands of federal small business grants on Grants.gov, which is operated by the Department of Health and Human Services. However, these grants often have very specific eligibility criteria, so you will want to review your qualifications before applying.

There are also local economic development agencies and corporations that are charged with promoting business and job creation, says Hal Shelton, a small business mentor serving with the Washington, DC chapter of SCORE – a non-profit organization that provides free resources for small business owners.

Many of these local organizations offer business grants and even low-cost loans. For example, New York’s Empire State development agency offers a range of funding opportunities for small businesses, including the Global NY Grant Fund program, which offers grants of up to $25,000 to businesses based in New York who are looking to start or increase their global exports.

While small business grants are great if you can get them, applications can be competitive and time-consuming. If you need faster funding, you will need to consider other options.

Check: Why hiring your kids to work in the family business this summer can be a tax-smart decision – for you and for them

3. Increase equity

If you have a loyal customer base and the drive to market your business, you may want to raise funds. With a crowdfunding platformyou can raise capital online — investors give you capital in exchange for an equity stake in your business.

After Charles Alexander and his co-founders were unable to secure a bank loan for their business, The Black Bread Company, they decided equity crowdfunding was a good option tied to their community roots.

The goal was to be able to offer the lowest buy-in for stocks, says Alexander. They wanted people to be able to invest in a business they know well — let them be part of the growth and do it at a pace where almost anyone could be part of the journey, he says.

However, equity crowdfunding is not a quick and easy funding solution.

“It’s a long process when you release shares of your company to the public,” says Alexander. He notes that business owners will need to ensure that they follow the guidelines and regulations of the United States Securities and Exchange Commission.

Many equity crowdfunding platforms, such as Fundable, StartEngine, and Netcapital, offer a variety of support services to help business owners through the fundraising process. StartEngine, for example, provides small business owners with a dedicated fundraising strategist who works with them throughout their campaign and helps them with both marketing and advertising strategies.

Preparing for a crowdfunding campaign can be frustrating, says Alexander. “But once we launched it was great. We literally raised about $660,000 in 30 days.

Don’t miss: US Inflation Set to Remain Elevated: Traders See 4 Straight Months of Around 9% or More CPI Readings

To be successful with crowdfunding, you need to put time and effort into promoting your business; and of course, you must be prepared to give up some ownership of your business.

More from NerdWallet

Randa Kriss writes for NerdWallet. Email: [email protected]