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Understanding Your Options for a Personal Loan

Financing a small business is no easy task. Bank loans – even through the SBA – are hard to come by and involve seemingly endless red tape, grants for startups are all but nonexistent, and private equity investors and venture capitalists typically won’t give you the time of day unless you have sales of at least $10 million. Thankfully, alternative small business loan options like crowdfunding, peer-to-peer lending and 401(k) rollover funding exist for smaller-scale entrepreneurs with decent credit, viable cash flow and a stellar business plan.

“You must bring money to the table to start or expand your business,” advises Tom Raymond, a Michigan-based business counselor with SCORE, a small business mentorship non-profit. Expect to dip heavily into your savings and retirement funds, putting up an average of 25% of the funds you need to raise.

Asking friends and family for a loan is usually the next step, and an important one, too, Raymond adds, as long as you treat them like any other investor and offer some form of interest. They can give you honest feedback about your ideas, products and services, and you’ll be inclined to restock Mom and Dad’s nest egg quickly.

Here’s a rundown of several more non-bank options for a personal loan:

Peer-to-Peer Lending: With services like Prosper and Lending Club, you submit an online application (with similar information that you would need if you were applying for a credit card) and their “credit marketplace,” a community of individual and institutional investors, can choose to help fund your loan, typically in the $5,000-$100,000 range. Even if you have an average or below-average credit history you can still get funded, though you’ll pay higher rates for the capital. Plus, making on-time payments helps to boost your credit report.

401(k)/IRA Rollover Funding:  Companies like Benetrends and Guidant Financial help you put the money you’ve been saving for retirement into starting, growing or recapitalizing your business, all while meeting the IRS’ strict requirements, tax-free. The process involves rolling over your current retirement plan into a new one created for your company, with a portion of the rollover funds directed to be invested in stock in the business. Funds from the stock purchase are released for business expenses, providing working capital for your business. A qualified retirement plan is then set up at the new company and made available to all eligible employees, so everyone continues to save for their golden years.

Crowdfunding: Peerbackers and Fundable are just two of the many available crowdfunding options. They help businesses launch fundraising campaigns by making investors out of donors. Investors – anyone from friends and family to total strangers – can purchase debt or equity in your business, and if your enterprise meets a pre-set funding goal and succeeds, those shares, which have risen in value, can be sold for a profit.

0% Intro APR Credit Cards: You can apply for a new card and find out if you qualify in just a few minutes. This is a good option only if your cash flow will allow you to pay off the entire balance before the introductory rate expires in order to avoid paying interest charges and much higher interest rates.

“No one is going to give you money to start your business unless they know you and love you, or you have excellent credit,” reminds Raymond, so do whatever you can to clean up your credit score before you start shopping for a loan. It helps tremendously if you already have a steady job “so you have the ability to provide income for your family and yourself while pursing your dream of having your own business.”


Miriam Reimer

Miriam Reimer

Small Business & Entrepreneurship at Fundera
Miriam Reimer is a small business and entrepreneurship columnist at Fundera. Previously she wrote for Forbes, TheStreet, Jewcy and StarChefs. Follow her @miriamsmarket.
Miriam Reimer