Skip the Bank: Where to Find a Business Loan when Banks say “No!”

Banks don’t really “get it” do they?  You stride into a bank with all the confidence in the world… and you slink away because they just don’t want to put their money into your business.

That’s no reason to give up. There are at least 4 other major sources of business capital available to you. Check this out:

1. Hidden Personal Wealth

If you really believe in your business – and you should – then it’s natural that you should try to bankroll your own company’s growth.

I’m not a believer in loading up your personal credit cards or getting a second mortgage, however. Instead, look for “hidden” sources of personal wealth such as:  life insurance policies, 401(k) plans, IRAs and stock portfolios. All of these can be tapped — sometimes quite painlessly.

My favorite place for a quick hit of business capital is my life insurance policy.  If you have a whole life policy, you may have the option of withdrawing its cash value (before you die, I mean!).   Even better, you can pay the balance back (to yourself) at a flexible rate – or not at all if you chose.  In some cases, any unpaid balance will simply be deducted from the death benefit when you die.  You can’t take it with you anyway, so why not use it to grow your business?

Retirement accounts are the next logical place to look for hidden wealth. A 401(k) may have cash value that can be either withdrawn or used as collateral for a loan.  IRA accounts, including SEP and SIMPLE plans, typically have stricter limitations on borrowing or investing.

But wait, there’s something even better than borrowing against your retirement accounts.

Did you know you can actually invest your own retirement account into a company you own? (Read more about using retirement accounts for business.) Doing so requires filing a few forms — and your business must become a “C” corporation — but there is good help available to make this simple.  If you have questions on this, call me, call your personal financial planner… or click through here to have an agent call you about converting your retirement account to business capital.  This link goes to “The Business Finance Store”, and I have personally used them for this process.  They are smart, efficient, and reasonably priced.

Finally, don’t forget about your stock accounts.  Most brokerages offer “margin” loans, meaning you can borrow against the value of the stock.  Did you know that your local bank may be able to do the same thing… and offer better interest rates?  Its true.  Pull out your latest brokerage statement and see what they can do for you.

2. Angel Investors

If your personal resources are tapped out, don’t despair.  The next best source of small-business capital may live right next door.

According to the University of New Hampshire’s Center for Venture Research, there are more than 400,000 active individual investors — or “angel investors” — who invest in more than 50,000 companies each year.  Many of the most active join “Angel Investor Clubs”, and there’s a great online resource to locate one near you — check out http://www.angelcapitalassociation.org/directory/.

In addition to these “active” angels, keep an eye out for more opportunistic individual investors. Casual investors – most often people you already know – pour millions of dollars into young businesses with little formality or fanfare.  Like the businesses they invest in, both casual and active investors come in all shapes and sizes.  And remember, Angel investors are not just for start-up companies.  Businesses of every size take on financial partners.  There are a number of articles on this site that can help you navigate a private investment.

One tool you’ll need when you take on an Angel investor is an Ownership Calculator to figure out the stock holdings and voting rights of each investor.

3. Commercial Lenders

But let’s get back to borrowing.  Loans are almost always cheaper than selling stock, and give you a lot more flexibility in the long-run.

When your need for cash is critical, and a bank shrugs their shoulders, check out a commercial finance company.

Commercial finance companies – also called commercial lenders – are not subject to the same regulations as a bank so they can look at riskier loans and different kinds of collateral. Of course, to make up for the increased risk commercial lenders may charge slightly higher rates of interest.

Collateral for a commercial loan could include things your community banker might not even understand, like accounts receivable, inventory and factory equipment.

And if you don’t have a lot of assets? Look for unsecured, mezzanine or subordinated loans. Rates for these loans are about equivalent to those of a credit card.

Subordinated and unsecured credit is widely available to businesses with solid operating profits, sometimes to the tune of two or three times annual cash flow.

The biggest commercial finance lenders include GE Finance, Textron and CIT. But there are hundreds of smaller shops that specialize in lending against particular types of collateral or to businesses within a particular industry.

4. New Online Lenders

The web was long the playground for business loan scams and real loan sharks.  All that has changed recently with the advent of “community lending” and other loan marketplaces.  These websites take applications from small business owners and invite wealthy investors to underwrite the loans one at a time.  That means that approval is based more on the story you tell (your business plan) than on anything else.

We have used and endorse Funding Circle.  There are others too, of course, including Kabbage.com, a well-known and reputable site.  If you need between $5,000 and $500,000 — and can afford to pay it back (at higher than normal interest rates and over a period of 2 to 3 years), then these are great places to start.

So now you know.  When your banker says “NO”, the money hunt is just beginning.  Branch out to Angles, Commercial Lenders and to your own Personal Financial Planner for advice on less traditional (but ultimately better!) types of capital.

Got a good story about a banker saying “NO” to your business?  Share it with me in the comments below.

Dedicated to your (Creatively Funded) profits,

David

PS: If you end up selling stock to an angel investor, please be prepared to calculate the ownership and stock  you’ll offer him. Check out my Investment and Ownership Calculator for more.

photo credit: Thomas Hawk via photopin cc