Understanding Options: The Key to Small Business Funding

In order to take a business idea from fledgling venture to full-blown company, young entrepreneurs must gain access to some level of funding. But in today’s ultra-competitive marketplace, knowing where to find finding isn’t always the easiest of tasks.

The Nitty Gritty of Small Business Funding

It’s impossible to build a business without money, yet more and more small businesses are finding it challenging to get the financing they need through traditional funding.

According to one recent survey of 10,000 business loan applicants in the United States, 82 percent were denied financing by their bank. That means less than one in five businesses can get financing via a small business loan, which was at one time the primary means of funding for new ventures.

Lending to small businesses is being seen as increasingly risky among banks and credit unions – especially when compared to mortgage lending and/or lending to large, established companies with a track record of paying off debt.

“In addition, given that the underwriting costs for evaluating, verifying, and processing a small loan is roughly the same as for a larger one, banks can increase their profits by focusing on larger loans to bigger businesses (small businesses typically request loans of less than $500,000),” business journalist Susan Ward writes.

Many traditional lenders are stuck in the past and don’t have the resources to vet risk in a dynamic business landscape. As a result of these old risk assessment methods, they’re unwilling to look past metrics that may or may not indicate accurate chances of success. But the good news is that it gives an opportunity for alternative lenders to move in and offer unique financing products that benefit small businesses in creative ways. For small business, the challenge is finding these methods.

Top Methods of Funding

Small business owners and entrepreneurs are discovering that more options typically produce better terms. The more a company is able to compare and contrast options, the more likely it is that they’ll find a solution that works for them.

Online lending is one of the first methods small businesses look toward. For starters, it’s far easier to apply for a loan online than it is to set up an appointment with a local bank, sit through a presentation, fill out the forms, and wait for a manual underwriting process to take place. You simply click a link, type in some info, and get an approval or denial within the same day. Certain online business loan providers even deliver decisions within two hours (and funds within 24 hours).

In addition to online lenders, some small businesses look to crowdfunding. As entrepreneurs Erin El Issa and Jackie Zimmerman explain, the concept of a crowdfunding campaign is simple: “You use a crowdfunding platform to create a profile for your business, project or service, set a funding goal and publish your request online. Interested people can then give cash donations to your cause, often in exchange for company assets in the form of rewards or equity.”

The biggest benefit of crowdfunding is that businesses don’t have to pay the money back. Instead, they offer small rewards and tokens of appreciation. While there won’t be any big single donors, there’s power in numbers here.

Finally, as traditional lending methods have dried up in recent years, many entrepreneurs are turning towards friends and family, or hard moneylenders, as very real options for infusing capital into their businesses.

With friends and family funding, entrepreneurs typically get access to far better terms than a bank or credit union can offer. With lower interest rates, higher loan amounts, and longer repayment periods, it’s far easier to accomplish key business objectives without the constraints of high interest and fee payments.

Patience in Spite of Friction

Funding is a frustrating topic for small businesses everywhere. When traditional methods of lending cease to be feasible options, stress and anxiety ensue. For business owners and entrepreneurs, it’s important to remain patient in spite of friction and realize that other alternative options exist.

Whether it’s online lending, crowdfunding, or financing with friends and family, there are always ways to find funds. As modern businesses recognize the need for flexibility, the industry will continue to shift in a positive direction.

Melissa Thompson writes about a wide range of topics, revealing interesting things we didn’t know before. She is a freelance USA Today producer, and a Technorati contributor.