5 loan options to fund your small business

Your Business Credit columnist Elaine Pofeldt
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.

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Question Dear Your Business Credit,
I need to get a business loan of $5,000, but everywhere I have checked I can’t get one. Is there anywhere I can get help? I don’t have relatives or a co-signer. Thank you. – Diane

Answer Dear Diane,
It’s not easy for many business owners to get a loan, especially if they are running a startup. Finding the money you need may take some creative strategies.

I’m not sure from your note where you turned for a loan, so I’m going to assume you tried to apply for a loan from a bank, a source many business owners turn to first.

Here are five options:

1. Apply for a business credit card.

If you are new to business, a business credit card will require good credit, and your personal credit will be tied in with your application.

In other words, getting a business credit card likely will require some sort of personal guarantee that you will pay the loan.

2. Ask a community bank for a loan.

If you have good credit and tried getting a loan from a big bank, you could apply for a loan from a community bank.

Don’t have a relationship with a community bank? Look into online services such as Biz2Credit and BoeFly, which act as matchmakers between borrowers and lenders.

3. Consider peer-to-peer lenders.

Another option that may be worth exploring, particularly if you don’t have strong enough credit to get a bank loan, is peer-to-peer lending.

Prosper and Lending Club offer small-business loans. In peer-to-peer lending, the money comes from investors, who make money by receiving the interest on the loan. You can use tools on the sites to find out what your interest rate would be.

4. Borrow against your receivables.

You didn’t mention what type of business you run. If your customers pay you after you have worked with them, such as a professional services firm, you may be able to borrow against your receivables.

One service you might look into is Fundbox, which gives you the full amount of qualifying invoices upfront. It connects to major accounting software programs such as QuickBooks, Freshbooks and Xero. You must pay back the loan over 12 or 24 weeks.

If you go this route, it is important to understand that the company will deduct its repayment amount directly from your business bank account in set amounts every week until the loan is repaid. This can leave you in a situation in which you are low on cash for the duration of the loan, unless your future cash flow is steady.

5. Crowdfunding is another option.

If you are looking for a business loan to fund an innovative startup idea, you might try running a campaign on a site such as Kickstarter or Indiegogo. 

Crowdfunding is especially good for entrepreneurs who are very active on social media and may be able to generate interest in a campaign quickly. 

Kickstarter and Indiegogo rely on what is known as donation-based crowdfunding. That means people are actually donating to your business and you don’t have to pay them back, as you would with a loan.

In reality, many entrepreneurs who introduce a new product will, in exchange for the donation, allow fans to preorder it. As a result, supporters will be expecting to receive the product by the estimated delivery date in exchange for their money. That expectation can lead to griping if you hit some bumps and the product is not released on time.

Regardless of which option you choose, I would recommend working on building your credit, because, as you’ve discovered, good credit comes in handy with a small business. For ideas on how to do build your credit, see our 3 steps for establishing business credit. The better your credit, the more options you will have in the future.

See related: How to apply for a business credit card, My business credit card makes me feel like a grown-upMaking 0 percent cards work for your small business, How many business cards should you have?

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Updated: 02-19-2019