If your business is new, needs cash quickly or wants to borrow less than the minimum loan amount, bank loans might not be your best bet. Here's a look at four alternatives:
1. Venture capital funding
- What it is: Investment from individuals and other sources. In return, investors take an active role and equity stake in the company. Venture capital (VC) firms usually invest $1 million or more.
- Businesses most likely to qualify: VCs tend to favor technology companies, especially those in a major city or Silicon Valley.
- Pros: You'll often receive both business and legal guidance. You can go through multiple rounds of VC funding to get more cash over time. Also, VCs often are willing to wait seven to 10 years to see a return on their investment.
- Cons: It can take from a few weeks to six months to obtain investment dollars. You'll lose some control of your company; VC companies are known for taking founders out of the CEO position. If your business isn't in a high-growth sector, you probably won't get funding.
- Where to learn more: Find out where VCs are investing at PricewaterhouseCoopers MoneyTree Report, the National Venture Capital Association website or from the UPS Strategic Enterprise Fund, which invests in companies serving emerging markets that impact UPS.
2. Kabbage lending
- What it is: Kabbage provides quick six-month advances from $400 to $40,000, using data such as sales and order information from online sales and UPS shipping records. Repay in 30 days or fewer and your fee would be 2 to 7 percent of the total advance; take six months and you'd pay 10 to 17 percent.
- Businesses most likely to qualify: Online sellers and UPS customers.
- Pros: Fill out an online application and the money is quickly (in an average of seven minutes, the company says) transferred to your PayPal account.
- Cons: The fees are often higher than bank interest; maximum repayment time is capped at six months.
- Where to learn more: Visit kabbage.com.
3. UPS Capital® Cargo Finance
- What it is: Borrowing against imported goods en route to you. "Say you're an American company and you'd like to bring in goods from China. Often, you'll have to pay up front before they ship or even produce your goods," says Kranti Sharma, North America marketing manager for UPS Capital. UPS Capital can provide up to 50 percent of the value of the goods up front. Loans of about $150,000 to $500,000 are common; repayment times are generally about 60 days.
- Businesses most likely to qualify: Those that have been in business for at least three years and have at least $2 million in annual sales.
- Pros: Avoids cash-flow problems while goods are in production and in transit. Once you're approved, you don't have to reapply for future loans. Interest rates are competitive with those of traditional banks; helps improve the efficiency of your supply chain.
- Cons: Not available for startups; only for businesses with at least $2 million in annual sales.
- Where to learn more: See loan eligibility requirements, main loan features, and benefits on the UPS Capital Cargo Finance website.
- What it is: Loans range from a few hundred dollars upward; in the U.S., a microloan can't be more than $50,000. Typical loans are for 12 to 18 months. Interest rates vary widely by country and lender. For microloans in the U.S., interest rates average 7 to 10 percent, with a maximum of 36 percent. Outside the U.S., the average is about 25 percent.
- Businesses most likely to qualify: U.S. borrowers range from fledgling home-based businesses to established brick-and-mortar stores, and even family farms.
- Pros: You may qualify even if you have past credit problems. "We work well with borrowers who have strong cash flow each month and have a pretty firm idea of where their business is going," says Laura Kozien, director of communications and marketing for microlender Accion's U.S. Network. You can take out small, personal microloans to build up credit and qualify for a business microloan, a traditional bank loan or even venture capital.
- Cons: Interest rates can be high, usually comparable with credit card rates. Borrowers should be wary of the annual interest rate and whether it's a fixed rate (one that will not change during the life of the loan).
- Where to learn more: Visit the Association for Enterprise Opportunity and the Accion U.S. Network.