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Small business owners have it tough today. Not only do they design, develop and market their own products and services with limited resources, but they also have to constantly fight with lenders to get the financing they need to keep the lights on.

In our conversations with entrepreneurs we realized that many need help finding out how to get a small business loan. But, more importantly, we discovered that these business owners are also looking for alternative financing options. As banks are continuing to reject loan applications at a record rate it is becoming more difficult for businesses to get the financing they need to survive.

Why is it so difficult for entrepreneurs to get approved for small business loans?

What can small business owners do to increase their chance of success when applying for a loan? What are their options if they get turned down? We answer these questions and more to help entrepreneurs get a small business loan.

Small Business Loan Requirements

Every business has unique needs and capital requirements. This is what makes getting approved for a business loan so difficult for most small business owners. A lender must evaluate the risk involved based on current assets and past business performance. For small businesses and entrepreneurs this is where they usually fall short. Many startup companies have limited assets and only a short business history.

When applying for a small business loan, applicants will need to have enough evidence to prove that their loan will be a low-risk investment for the lender. While each bank will have different requirements, there are a few items each business owner should have prepared before applying for a loan.

Required Loan Documents:

  • Business Plan
  • Cash-Flow Projections
  • Business Tax Returns
  • Personal Financial Statements
  • Credit Report

Required Loan Collateral

It is important to note that many small business owners will find themselves in a situation where they must personally guarantee their small business loans with a home mortgage or other personal asset. While this is common due to financial constraints of small businesses, it is also a risky proposition for new business owners. If they run into financial hardship, not only will their business go under but the borrower will also lose the collateral to the lender.

SBA Loans

The Small Business Administration (SBA) offers government-guaranteed loans to business owners that need access to credit. These loans are available to small business that might not otherwise qualify for financing. Since these loans are backed by the government, banks can provide more flexible terms compared to more traditional business financing.

Business owners will be relieved to hear that qualifying for a SBA loan is easier than traditional financing. A small business owner may be able to borrow up to 100% of the loan request. These type of loans also offer longer financing terms and flexible repayment options.

While SBA loans can be used to purchase real estate, equipment and machinery, they do come with certain restrictions. For instance, in order to qualify the business must be owner-operated and organized as a sole proprietorship, corporation or profession partnership. The business owner must be unable to secure other credit under reasonable terms.

Alternative Small Business Loans

Business owners are encouraged to consider a wide variety of financing options for small business loans. Among the possibilities, peer to peer lending has become an extremely popular alternative to traditional small business loans. For borrowers that are unfamiliar with this new type of financing we recommend reviewing our guides on the two leaders in the peer to peer lending market: Prosper and Lending Club.

Peer to Peer Lending

Peer to Peer lending (P2P) is a new way to finance small business or personal loans without a bank. In today’s difficult economic environment these new loan alternatives have reduced the complexity and high cost of bank lending. Social lending connects individual borrowers to investors through a third party service such as Lending Club or Prosper.

The primary advantage of peer lending is that borrowers get lower interest rates and lenders receive higher returns on their investment.

Peer to peer lending allows borrowers with good credit to get small business loans at attractive interest rates. Today these lenders offer an alternative for borrowers in place of conventional funding options such as banks or credit cards. Peer lending networks provide a simple and convenient process for borrowers to find lenders at lower interest rates.

A borrower can instantly find out the interest rate they qualify for by filling out a business loan request online. Most online lending networks have very high credit standards to reduce risk to their lenders. If a borrower qualifies they will receive a fixed interest rate over the term of the loan. This interest rate is calculated by a number of risk factors as determined by the peer to peer lending site.

Crowdfunding

Crowdfunding is a relatively new small business financing alternative. Crowdfunding allows a large group of investors to invest small amounts of capital to fund a startup in exchange for equity.

Businesses can use crowdfunding to raise capital for many purposes. Some of the most successful examples include launching a prototype product where a limited number of backers get priority access or limited edition items. These types of business crowdfunding campaigns can be found on sites like Kickstarter, IndieGoGo and RocketHub.

Small business financing is also available from sites like Microventures that connect individual investors to startup companies. This type of financing allows investors to receive equity in the company rather than access to products or promotional items in exchange for their investment.

See also: 5 Unique Benefits of Crowdfunding

As we attempted to outline in our guide on how to get a small business loan, there are many financing options available to business owners. Although financing requirements have not gotten easier, there are many more alternatives than ever before. For business owners and entrepreneurs that are looking for new financing sources other than traditional bank loans, they may want to consider new options such as peer to peer lending or crowdfunding.

For more information on alternative small business loans please refer to the resources available on this website.