Can't Get an SBA Loan? 4 Funding Alternatives

When you are unable to finance your business needs with an SBA loan, there are other options you can consider. You will want to explore each of them before making your final decision. The one that offers the lowest loan rate may not necessarily be the best option if you are not comfortable using the source for your funding.

1. Peer-to-Peer Lending

Peer-to-peer lending is also known as person-to-person lending. There is no financial institution involved, since you are borrowing the money from one or more individuals.

A peer-to-peer lending service may be structured to let individuals bid to fund your loan. The bidders offer a certain interest rate, and the low bidder secures the rights to your funding.

Many peer-to-peer lending services are available online. One of the things they do is investigate your credit, so the individuals who want to finance your loan can see your credit history. They will then use this information to set the rate for your loan. The loan can usually be arranged so you have up to five years to pay it in full.

2. Friends and Family

While using a friend or family member for a business loan may not be your first choice, the terms you can get are often advantageous enough to make a loan worthwhile for all parties concerned. While you do not want to abuse your relationship, if you carefully negotiate the loan terms, your funding will usually work out in your favor.

To give a friend or family member an incentive to help you, offer him or her part-ownership in your business until you have paid off the loan. You can also involve the party in how you run your business, so he or she can see how the investment is performing.

3. Seller Financing

If using seller financing, you may have to put down enough money on your loan to make the seller comfortable with the risk. Some sellers may require additional collateral if your down payment amount is insufficient.

If you decide to use seller financing, see if the seller will structure the loan so that the payments do not put a strain on the cash flow of your business. One way to accomplish this is by having a balloon payment at the end of your loan.

4. Retirement Funds

Borrowing from your retirement account should be one of your last choices, due to the tax implications that can occur. You should meet with your accountant to have him or her analyze the cost of borrowing from your retirement funds compared to using any other funding sources you have available. Keep in mind that retirement loans are available only from certain accounts and that borrowing from an IRA is not permitted.

The biggest drawback to using your retirement funds for a loan is that, if you are unable to repay the loan amount, the unpaid balance is then considered a distribution subject to income tax. In addition, if you are under 59 ½ years of age, you will have a 10 percent early distribution penalty to pay as well.