Understand Your Options if you Don’t Qualify for Conventional Business Loan

If you’re looking to start or grow your business, unless you’re fortunate enough to have a reserve of savings or a benevolent angel investor, then you’re going to need a business loan.

So where do you start? A recent study found that over 63 percent of business owners target banks as their first source of funding. Unfortunately, the success among these respondents of actually getting a business loan was a low 27 percent.

The challenge of obtaining loans on Main Street

For a start, lending requirements are much tighter now than they were before the financial crisis and small businesses, particularly start-ups, are still considered a risky bet by many lenders. Likewise, many larger banks don’t even offer small business loans as part of their portfolio – they simply aren’t profitable enough.

Furthermore, while borrowing and lending conditions have recovered in recent years, data from the SBA Office of Advocacy suggests that the improvement has been more gradual for smaller firms. In 2013, the dollar value of small business borrowing was down despite the fact that bankers reported easing their standards and terms on commercial loans to businesses of all sizes.

Yet, despite the harsh realities of securing conventional credit, there are several alternative options for start-ups and growing small businesses, even those with bad credit. Let’s take a look:

SBA loan programs

While banks may look upon small businesses as a high risk investment, that doesn’t mean they have nothing to offer small businesses. Many participate in SBA’s lending programs. The SBA doesn’t make loans directly to small businesses looking to start or grow; instead, it guarantees a percentage of the loan, reducing the risk to its lending partners and making it easier for business owners to get the financing they need.

SBA loans are experiencing unprecedented growth right now (by the end of the 2014 fiscal year, SBA had increased the number of loans made through its flagship 7(a) program by 12 percent and 7.4 percent in dollar amount over the previous year).

Small businesses can apply for these loans through their bank or authorized SBA lender. Read more about these loans, how the funds can be used and how to apply in: SBA Loans Explained – A 101 for Small Business Owners.

Business line of credit

If you need short-term working capital, a business line of credit is another option. Unlike a business loan, you can apply for a line of credit before you need it and use it only when you need it. Repayments are only made as and when money is borrowed. Lines of credit can be used to fund inventory, purchasing new equipment, overcoming cash flow issues, etc. Of course, there are drawbacks – accumulated debt being one of them. Since there is no fixed payment requirement, businesses can be tempted to pay off only the minimum each month, much like a credit card.

Credit unions

Credit unions are very attractive options for small business owners. These member-owned, not-for-profit financial cooperatives offer a range of savings, credit and financial services that emphasize affordability. They also offer higher savings rates and lower loan rates than traditional banks. In fact, lending by credit unions is outpacing banks by almost double. Credit unions offer their own term loans (many with flexible repayment schedules and the opportunity to pay down loans ahead of time without penalties), lines of credit, as well as SBA loan programs.

Got bad credit? Try alternative funding programs

If you’re struggling with bad personal credit, many banks will take into consideration other factors such as bank history, credit card sales, credit partners, and other data sources, explains Marco Carbajo in Is Bad Credit Stopping you from Getting Business Loans?

Revenue-based loans, merchant cash advances, using a business partner as a credit partner to get lines of credit in the form of business credit cards – are all viable options for overcoming a personal credit challenge.


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