Other Loan Options
By Carol Tice
Small businesses need money to get started, pay bills, and grow. When securing traditional loans from a bank isn't possible, small businesses should consider a few loan alternatives.
Here are a few alternative sources of capital for businesses to try in place of traditional bank loans:
- SBA loan programs: The Small Business Administration is one of the best resources for small businesses seeking a loan. The SBA offers several loan programs designed to help small businesses. The most notable loan program run by the SBA is the 7(a) program. There are a number of other loan programs that the SBA offers. One such program offers microloans which are loans under $50,000. These microloans carry rates from 8 percent to 13 percent, and they can't be used to pay off other debt or buy real estate. The microloan program is generally easier to qualify and can be used as a supplement to other loans that a business receives.
- Unsecured business line of credit: Businesses with an existing banking relationship can request a line of credit which can be accessed at the borrower's discretion. Businesses can request a line of credit in the form of a demand loan, export packing credit, or term loan. Businesses facing difficulties can request an unsecured business line of credit (UBLOC). UBLOC's are usually quicker to get than a typical bank loan, especially for loans under $100,000. Business owners can use UBLOC funds for operational requirements, refinancing, and other business needs. Securing a line of credit can be difficult for firms with lower quality credit scores.
- Equipment leasing: Businesses that have lucked out when it comes to traditional loan sources may have to think outside the box. A company that needs equipment, for example, may be able to obtain it from equipment producers who are willing to loan out their goods to sustain growth or trigger new business.
- Tapping 401(k) accounts: As a last resort, business owners can access funds from their 401(k) account. While most financial planners would advise against this action, tax law allows for businesses to use retirement savings to fund a business without tax penalty. This is a relatively easy process if the 401(k) account is with the company in need of a loan; the funds are simply borrowed from the account to invest in the business without penalty. If the 401(k) is with an outside retirement fund management firm, create a new 401(k) plan at the business, roll over the funds to the new 401(k), and then borrow it tax-free. The holder of the retirement account essentially becomes an investor in the business and acquires an ownership stake for as long as the loan is outstanding. If the business is sold before the loan is paid off, the account gets a share of the profits.
This list provides just a few ways that small businesses can go about getting capital when credit is hard to come by. Other loan alternatives include peer-to-peer lending, credit card accounts, and venture capital. When primary loan options have been exhausted, small businesses can look into loan alternatives to get the capital it needs.
Looking for other financing options? Check out our complete list of options for funding your small business.
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