8,000 small business loans are turned down per day in the U.S., and this has created an amazing industry of alternative funders and cash advance lenders. This is expensive money, but sometimes desperate measures call for the need borrow funds just to keep your business going. There are plenty of lenders willing to do these unsecured cash advance loans, but there’s a hefty interest rate to pay. Don’t forget that Community Development Financial Institutions (CDFIs) that are non-profit lenders who are more willing to work with small businesses, especially if you credit is not exceptional. Check out the website www.tiltforward.com to find a CDFI lenders in your area.
No matter who you decide to use, before you borrow money from anyone it’s important to think it through carefully. Here are 9 questions you should ask yourself about your business before pursuing alternative funding.
- What are the biggest challenges confronting your business?
Be honest with yourself about whether or not money is really going to solve the problems in your business. Often you might need to fix something else before taking on this kind of expensive capital. Your revenue model must be tight.
- What is really working well in your business that can spur your growth?
Are you selling out of inventory quickly? Do you have customers lined up, but you just need capital to order materials/equipment to do the work? You want to make sure that you have a way to turn this cash into more cash quickly and repay your loan. Alternative funding is for businesses with immediate working capital needs, it’s not smart to use these funds for long-term investments such as marketing.
- How much capital are you looking for?
You need to have a clear idea of how much money you really need. Often people guess at these numbers. Sit down with your accountant and work through what is really needed to grow your business. Then ask for 10% more than the minimum needed. Keep in mind that you must be realistic. No one will loan you more than 10-15% percent of your gross revenue unless you have a signed contract or invoices to sell.
- Are you in a position to pursue conventional bank financing?
Always try the bank first. Conventional bank money is much cheaper than any alternative lenders, but it’s also really hard to get especially when you really need it. You want to apply for a bank loan or line of credit when times are good, not when you are going through a hardship situation. Banks also don’t move fast. Remember, your personal credit will pay a role in any lending decision someone makes about your business.
- What will the capital be used for?
Once you know how much money you need, write up a strategic plan for what you are going to do with the cash. Be as specific as possible. Also highlight how much money this cash will make the business, you want to make sure that your sales are enough to make a healthy profit to payback the loan, otherwise it might be worth taking the money.
- What is your expected returns on the capital requested?
You want to insure the return on investment EXCEEDS the cost of the capital. Develop a clear plan for how many times can you turn the money over in your business.
- Do you understand the cost of this capital?
In some cases, you could be charged on the low end 16.99% interest all the way up to as high as 65% interest on a 6 to 12-month loan. These loans rarely are extended more than a year.
- How will your payments be collected?
Typically, your payments will be deducted from your bank account daily, or weekly or monthly as an auto draft from your checking account.
- Are there any closing costs or penalties for early payoff with this alternative loan?
Often lenders and brokers will add fees to these cash advance loans of $2,000 to $5,000 depending on the size of the loan. The money is deducted off the top of the loan. Also ask about any penalties for an early payoff.
Money in a business is like blood in the body, it is required to live, but all money is not good money. Borrowing money from the wrong alternative lender can put you out of business. When you think you are ready to pursue funding, do your homework. Give yourself enough time to pursue multiple lenders so that you can take the best deal.