This month, in our continuing series on alternative lending options for small businesses, we'll tackle the pros and cons of the strategic use of personal savings, peer-to-peer lending and government-backed loans.
Personal savings
Pros: When you use your private savings for business start-up or expansion, you eliminate the loan qualifying process, gain immediate access to capital and have no loan to pay back on a pre-determined timetable. Your "loan" won't be impacted by the ups and downs of global financial markets and you have no one to answer to from a financial perspective - the money is yours to use as you like.
Cons: Launching a business without going through the typical business planning steps required by traditional lending institutions can put you at risk for failure. Due diligence is vital, regardless of where your funding is coming from. Tapping your savings also reduces or eliminates both your personal and business financial safety net. A good compromise is to spread the risk broadly, when possible, which includes assembling necessary funding from a variety of alternative financing sources.
Peer-to-peer lending
Pros: Peer-to-peer, or P2P lending, matches borrowers who don't qualify for traditional financing with investors looking for a better rate of return than offered by traditional investment options. P2P creates a win-win, where businesses can get unsecured loans financed while investors pursue a better yield on cash.
Cons: Many regulatory issues are still in play with regard to P2P lending, making it vital that care is taken in investigating this alternative lending option. Most companies keep current data on defaults and other important statistics.
SBA and NMI
Pros: A number of small business loans are available through The U.S. Small Business Administration (www.sba.gov); "Microloans" are also available through Nevada Microenterprise Initiative (www.4microbiz.org), a private non-profit community development financial institution. Both the SBA and NMI provide consultation services free of charge.
Cons: There is really no downside to securing business financing through SBA or NMI - it is simply a more rigorous process than other forms of alternative lending, and like other forms of traditional finance, is subject to greater scrutiny and documentation than ever before.
Next month we'll look at equity lending options in the form of venture capital and angel investing
Dave Archer is the chief executive officer of Nevada's Center for Entrepreneurship and Technology. Contact him through www.ncet.org. The information presented in this article is for informational purposes only and should not take the place of professional financial consultation.
