With bank loans tougher to obtain in the past couple years, where’s a small business supposed to turn to get working capital or money for growth? I asked around and was referred by somebody I really trust (thanks Franchise King Joel Libava!) to expert loan facilitator Don Johnson, president of Diamond Financial Services. Here are a few of the loan alternatives Johnson says are doing well right now.
- Unsecured business line of credit: UBLOCs are usually quicker to get than a typical bank loan, especially for loans under $100,000. Johnson tells me you might secure one in a day or two, whereas a traditional loan could take weeks. The UBLOC can be used for a variety of business needs, including expansion and refinancing. The cons: Interest rates are higher than rates for loans from the Small Business Administration, and you’ll likely need a credit score of 700 or more to qualify.
- Equipment leasing: Loans for major equipment can sometimes be obtained from equipment makers, especially now, when they may be desperate to move more machines. If you’re a franchisee, your franchisor also may have an equipment-leasing program — many franchisors are adding such lending programs to keep growth on track.
- Mini-SBA: The SBA is best known for its guarantees of traditional bank loans, but a lot of business owners don’t seem to know that the agency also has a microloan program, which loans amounts of up to $35,000. The loans carry rates from 8 percent to 13 percent, and they can’t be used to pay off other debt or buy real estate. Johnson says his clients have found the mini-SBA is easier to qualify for than a traditional SBA loan. He adds that many of his clients are using the mini-SBA to get whatever funds they didn’t qualify for with a UBLOC. The program is administered by SBA-approved intermediaries in each state; so start your mini-SBA search there.
- Borrowing from the 401(k): You can borrow from your retirement savings to fund your business without tax penalty, though many financial planners advise against it. Johnson helps several of his clients tap their 401(k) funds, and he says it’s easy as pie to do if your 401(k) is with your company — you just borrow from the account to invest in the business without penalty. If your 401(k) is with an outside retirement-fund management firm, you can create a new 401(k) plan at the business, roll over your funds to the new 401(k), and then borrow it out, tax-free. The retirement account essentially becomes an investor in the business and acquires an ownership stake for as long as the loan is outstanding. If the business is sold before the loan’s paid off, the account gets a share of the profits.