Recent findings by the National Association of Small Business suggest that more business owners are relying on non-traditional forms of credit for business capital.
This is, in part, due to the fact that it's not so easy to get a traditional business loan from the bank. As such, more business owners find themselves relying on business credit cards or online lenders when they need capital.
I, myself, have built my business partly thanks to a business credit card. There have definitely been moments while I grow my business where a non-traditional form of credit came in handy, such as earlier this year when I found myself investing in new email marketing software.
However, you shouldn't take non-traditional loans lightly. Just because they are readily available and easier to secure doesn't mean you shouldn't think twice about them. Here are some things to keep in mind before applying for any new credit for your business from more non-traditional lenders.
Business Credit Cards vs. Traditional Bank Loans
While business credit cards aren't technically a business loan, it's pretty much the same premise in so far as you take on debt to invest capital in your business.
These are pretty easy to get your hands on because they go based off of your personal credit history. They also allow you to save money on business expenses via cash back and rewards and they sometimes even come with 0 percent APR rates for the first year. Additionally, because these cards are marketed toward business owners they have much higher credit limits than personal cards.
These products don't come without their cons though. Interest rates on business credit cards are much higher than business loan rates. According to the NSBA business owners are paying an average of 15 percent APR on their business credit cards.
You also don't want to get in the habit of overspending each month due to revolving credit. It's one thing if you put equipment you need on a credit card and aim to pay it off in a few months; it's an entirely different thing if your business is in the red each month because you keep taking on more debt with each billing cycle.
Alternative Lenders vs. Traditional Bank Loans
Online lenders have popped up in recent years to help individuals and business owners quickly gain access to loans when they need them.
For example, Kabbage is an alternative lender that boasts an easy application and approval process. Unlike a traditional business loan - which can take months of preparations and financials – alternative lenders take a look at current cash flow, credit, current statements and a variety of other factors to give you approval in minutes instead of months.
The downside of these lenders is they may have higher interest rates than a traditional bank loan; however. However, they are comparable to interest rates you would find on business credit cards. Their payment terms can also mean a very tight turnaround. For example, with Kabbage you typically need to pay off the loan within six months.
Borrowing from Friends and Family
I'm hesitant to mention this as a non-traditional business loan, but it is an option for some people. Your friends and family are the first people who want to see you succeed, and there are plenty of successful businesses, like Amazon, which have their beginnings in family loans. However, try to use this as a last result. Sometimes money really changes the dynamic of a relationship and can put stress on it.
Just because a bank may not give you a small business loan doesn't mean you don't have options. Thanks to new financial products and maybe even a little help from your friends, you can still get the capital you need to grow your business.