It is notoriously hard for small businesses to get loans, and it’s a problem that seems to be evergreen. If you’re just starting out, or operating on a slim, restaurant-like margin, how do you demonstrate to a bank that you’re creditworthy? What if you need a boost to get past a bad sales quarter or rebound from unexpected expenses?
Fortunately for small businesses, there are some genuine alternatives to a regular bank loan. There are a variety of different entities that are interested in lending to businesses that don’t qualify for a bank loan, including various nonprofit organizations like Community Development Financial Institutions (CDFIs), Kiva, and the Small Business Association (SBA). The SBA doesn’t directly lend money; rather it guarantees the loan from a lender who wouldn’t otherwise extend credit to the business in question.
But finding a lender is just one piece of the puzzle. Before you go hunting for a loan, you have to know what kind of loan you need—not only how much you need, but how long you’ll need it for. This is information any responsible lender will want, and the more specific your answers are, the happier a prospective lender will be. And, the more likely it is you’ll be able to pay the loan back on time, improving your business’s credit!
What kind of money do you need?
The first step is identifying what the loan is for. According to the wise folks at Nerdwallet, your need will likely fall into one of four basic categories:
- Starting a business
- Managing day-to-day expenses
- Growing your business
- Developing a safety cushion
Starting a business is a fairly self-explanatory category, and developing a safety cushion is pretty much what it sounds like. Just like you as an individual should have the equivalent of three months’ salary (at least) saved up for a rainy day, your business should also have a cushion. Of course, you want the cushion lined up before you need it. This can mean having money in the bank or a line of credit that’s exclusively for extreme circumstances.
Once you’re in business, most of your financial needs will center around working capital (day-to-day expenses) and occasional influxes of cash to help you grow.