Finding Alternative Funding: Free Tools
Whoever said “You get what you pay for” hadn’t seen all the amazing free tools available on the wonderland that is the Internet. If you’re a small business owner looking to save some time and save some cash—and what small business owner isn’t?—this is the series for you. “Series” because once we started investigating, we found that there were a lot more useful business tools available for free than we had previously imagined. Indeed, there are free tools for nearly everything you can think of, including alternative funding.
Our first installment focuses on M-O-N-E-Y—as in finding the alternative funding entities that will loan you some.
Finding Alternative Funding
Bob Hope said, “A bank is a place that will lend you money—if you can prove you don’t need it,” and anyone who’s ever applied for a business loan or a mortgage knows the feeling. Most small business owners will tell you the last five years have been a terrible time to try securing a loan. According to Fundivo, the total number of small business loans was in decline starting in 2009, at 695.2 billion, through 2013, when that number had fallen to 585.3 billion.
There are beginning to be some rays of hope, however. The weekly Lending Statistics for Major Programs for the Small Business Administration (SBA) loans have been on an upswing since 2014. The Federal Deposit Insurance Corporation (FDIC) Quarterly Banking Profile for the last quarter of 2015 shows a small but significant increase in small business and farm loans. Similarly, the 2015 Small Business Credit Survey conducted by seven Federal Reserve Banks across 26 states shows that “financing success” improved last year.
There’s a “but” coming. While the Small Business Credit Survey did show more financing success, it also found that half of the firms applying for a loan received less than the amount they requested. And although nonprofit and online lenders are offering alternative funding to traditional bank loans, small and large banks still account for 94 percent of all small business loans. (The numbers are much more evenly distributed for microloans under $100,000.) Part of the reason for banks’ continuing dominance may be that online lenders had the lowest borrower satisfaction, the result of “concerns with high interest rates and unfavorable repayment terms.” Small banks and credit unions had the highest satisfaction.
So, while it may be a little easier to get a small business loan (and will hopefully continue to get easier), it’s enormously important to make sure that you do your research and choose the loan that best fits your needs and circumstances. We’ve got some tools to help you find the right alternative funding your business needs.
What Lenders Look For
What lenders look for varies to some degree according to the type of lender, but there are two things every lender wants to see. First is that you have a plan: you know how much you need, exactly what you’re going to do with it, and exactly how you’re going to repay it. Second is that you are transparent: your business and personal financials match up.
Whatever type of loan you’re taking, your borrowing should match how you plan to use the money. So, take into consideration not only how much you need, but how long you’ll need it for.
Venturize is a new web site, a project of the Opportunity Finance Network (OFN), a national nonprofit network of Community Development Financial Institutions (CDFIs). CDFIs are mission-driven, private financial institutions. The Network found that borrowers didn’t have access to enough trustworthy information about small business loans, so they created Venturize as a solution. The site explains what each category of lender offers in a section called Borrowing 101. Here, you can find out the difference between a bank and a credit union, equity and reward crowdfunding, mission-driven lenders and online marketplace lenders.
The site’s greatest tool is a calculator that suggests what types of loan will likely work best for your circumstances—how much you need to borrow, how long you’ve been in business, your credit score, and how quickly you need the loan. There’s even a handy-dandy chart comparing the different types of loans. Venturize’s calculator does not suggest specific institutions or loans; rather, it gives you the likely range of costs and what the most important criteria are for the types of lenders it suggests for you. (If you’ve got other business numbers to crunch, check out our list of the best free business calculators.)
Venturize has a few other tricks up its sleeve. The site provides a Merchant Cash Advance Calculator and a Term Loan APR Calculator. The benefit of these calculators is that they help you see what you’ll really end up paying for a loan, factoring in the fees. The loan with the lowest interest rate may not end up being the most cost-effective. There’s even a mission-driven lender map, to help you find those nearest to you.
Once you’ve checked out what kinds of loans are likely to be the best, Venturize gets you ready for your application with a checklist and a list of questions you should ask before signing on the dotted line.
The Small Business Administration
Hopefully, you’re familiar with the Small Business Administration (SBA), which is designed to help folks start and grow small businesses. The site is full of helpful information (including loan checklists), links to local offices and calendars of events. The SBA doesn’t make loans directly; rather, it acts as a guarantor on SBA loans made by other entities, like traditional banks. If your small business seems too risky for a regular loan from a bank or other authorized SBA lender, they may be willing to lend to you if the SBA guarantees the loan—because that makes it less risky for the lender.
The SBA offers several different types of loans to startups and existing businesses. The 7(a) loan is the most common, as it can be used for a variety of purposes. Other SBA loan options are for export-assistance; seasonal working capital (CAPLine); real estate or related development; disaster recovery; and microloans. Veteran business owners are especially encouraged to apply for SBA loans, with favorable fees—zero for loans under $150,000. The SBA also encourages other traditionally underserved business owners to apply, including those in lower income or rural areas, and minority and women owners. If that sounds like a lot of information to wade through, it is. Fortunately, the SBA has a loan wizard to help you figure out which one of their options is likely to serve you best. Another of the SBA’s handy resources is its list of the 100 most active small business lenders.
Nonprofit Lending Agencies
Nonprofit lenders can make loans to business owners who may have credit or debt issues or whose business isn’t currently profitable, as well as owners without such issues. If a nonprofit lender can’t offer you a loan right away, it will likely work with you to get you in shape to qualify for a loan. These are lenders who want to hear your story.
Many urban areas have nonprofit organizations that specialize in microloans for local small businesses, some of which are CDFIs. Main Street Launch in Oakland and Adelante, a division of the Mission Economic Development Agency in San Francisco are two such organizations. Keep in mind that “micro” means different things to different agencies. Main Street Launch offers microloans up to $250,000. Adelante’s microloans are capped at $100,000, while for the SBA, a microloan is $50,000 or less. One of the great virtues of organizations like Main Street Launch and Adelante is that they provide borrowers with pre- and post-loan assistance and plenty of business education. Business Impact NW provides similar services to the Seattle, WA, community. In Portland, OR, Craft3 is a local CDFI providing loans to local business like Baerlic Brewing Company, Kiriko Made, and women-owned businesses Tender Loving Empire and CAPITAL Engineering and Consulting.
Nonprofit lending agencies usually have interest rates hovering around 7-13%, making them a bit higher than a traditional bank loan but lower than credit cards and many non-bank lenders. Loan terms can vary from 1 to 5 years, often with no prepayment penalty. They work with business owners who have been turned down for traditional and SBA loans, and turnaround time can be much faster than for a traditional bank loan. Usually, the most important factor is the borrower’s capacity to repay the loan, rather than criteria like the number of years in business.
Kiva is another type of nonprofit lending agency, one that offers small businesses 0% interest, community-based loans. Though they’re based in the Bay Area, they offer loans nation-wide. How does such a miraculous thing work? Kiva and agencies like them offer loans based on “your character and trust network,” rather than focusing on qualifications like your credit score. What this means in practice is that you must be able to demonstrate a network of family and friends willing to make a small ($25) investment in your business. Kiva’s loans are publicly fundraised by the community, which doubles as a little marketing campaign.
Online lenders and marketplaces are still fairly new to financial services, and it behooves small business owners to educate themselves not only about all the financing options available, but also the terms and fine print of whatever offers they consider. Online loans can be “considerably more expensive than traditional credit,” according to a study by the Cleveland Federal Reserve, and it can be hard to compare offers. Online marketplaces are designed to help borrowers do just that, though it can still be difficult to quickly compare all the loan terms.
Online alternative lenders are attractive to borrowers in part because they can very quickly assess creditworthiness and, thus, offer you a loan much faster than a traditional lender. However, the U.S. Treasury recently released a white paper noting its concern that these new “data-driven algorithms…also carry the risk of disparate impact in credit outcomes and the potential for fair lending violations.” Furthermore, borrowers “do not have the opportunity to check and correct data” that may be used in loan decisions. So, caveat emptor.
Here are three sites that provide lender profiles, and in some cases, reviews:
Fundera offers users a network of lenders who specialize in small business loans. The site not only allows you to apply to multiple lenders with one application, it helps walk you through each step, including a plan to qualify for less expensive loans in the future. But that’s really just the tip of Fundera iceberg. Their website offers verified reviews of small business lenders, which can be categorized by rating or type of loan product. Of course, they have calculators so you can figure out what you’ll owe for a given APR. But Fundera also provides a wealth of tools and templates. They have guides—what’s likely to hold up a loan, how to build up your credit history— and even a financial glossary. Fundera also does a quarterly State of Online Small Business Lending report, which provides a good overview of the current online lending environment.
Lendio also offers business owners a network of lenders specializing in small business loans, and helps owners determine what loans will be best. Like Fundera, they provide some business calculators and, more importantly, lender ratings and reviews.
Last but certainly not least, there’s NerdWallet. NerdWallet is a treasure trove of information on pretty much anything related to money, for both small businesses and individuals. In their Small Business section, they have lender profiles, which include what the process of applying for a loan is like, “reasons to use” a particular lender, as well as “where they fall short” for borrowers. Like the other two sites, they will also suggest what loans might work best for you and hook you up with a network of small business lenders. NerdWallet also has tons of resources like “Best Small Business Loans for Women,” “Best working capital Loans for 2016,” “Best Small Business Debt Consolidation,” and “8 Nonprofit Microfinance Lenders in the U.S.” Another (unrelated) site, BusinessNewsDaily.com, also offers recommendations backed up with lender information and the methodology the site used in making their picks.
While you’re investigating your alternative funding options, it’s worth stopping by the Responsible Lending Coalition’s site and perusing the Small Business Borrowers’ Bill of Rights, which can help you figure out what loan-related questions you need to have the answers to.
Any large financial transaction is complex and stressful. With these tools, you can more easily navigate the enormous quantity of information available and have some confidence that you’re making a solid financial investment in your business—and perhaps even finding some champions for it, too!