Seeking a trustworthy resource for financing can often be a challenge for small businesses. That’s partly because many traditional banks typically only lend to businesses operating for at least two years, and are generally hesitant to dish out smaller loans, particularly to unestablished operations.
This often leaves small business owners in a difficult position, scrambling to find alternative funding sources while avoiding predatory lenders offering unfavorable terms or employing fraudulent practices.
Fortunately, there are a few ways to secure reliable business financing without exposing your company to predatory lenders, ensuring peace of mind as you prepare to take the next step.
Related: 5 Best and Fast Small-Business Loans (Some of Which You’ve Never Heard of)
Explore nonprofit lenders
Community development financial institutions (CDFIs) provide a generally safe lending option, offering an aboveboard opportunity to seek financing and pursue your objectives. CDFIs are dedicated to expanding economic opportunities for underserved communities and offer loans of up to $250,000 for small businesses.
CDFIs tend to offer competitive interest rates, fixed-rate loans with minimal origination fees and even ongoing business training. And if you don’t initially qualify for a loan, most CDFIs will provide guidance and coaching to help you meet the requirements fairly quickly. One downside is that the CDFI loan approval and funding process may take longer than the traditional route, making it crucial to allocate your time wisely.
Related: How To Detect And Prevent Frauds In the Lending Industry
Consider government-backed loans
Government-backed loans offered through the Small Business Administration (SBA) can be a favorable alternative to predatory lenders. While typically provided by traditional banks, SBA loans reduce the risk for lenders, improving the chance for approval. SBAs usually require minimal or no down payment, as well as favorable interest rates and repayment terms of up to 10 years.
What’s more: the SBA offers various loan programs tailored to different business needs, even startup loans for entrepreneurs with bad credit.
Related: You Want to Start a Business — How Should You Finance It?
Beware of SBA look-alike scams
Unfortunately, some bad actors deceive unsuspecting business owners by impersonating the SBA, leveraging the organization’s legitimacy and reputation to rope companies into costly financing scams. Steering clear of SBA lookalike scams means knowing how to spot key red flags, such as:
- Unsolicited contact through advertising or telemarketing. The SBA will never reach out to businesses unpromoted.
- Unexpected emails from the SBA. Always confirm the origin of SBA emails before replying or clicking in-mail links.
- Upfront fees to facilitate SBA approval. The SBA never requires such fees and won’t enhance your chances.
- Requests for information about your credit cards.
- Software that claims to help you gain access to SBA loans. These are often malware and should be avoided.
Consider equity partnerships
While the idea of taking on an equity partner may seem daunting, doing so can be a viable option for capitalizing on high-growth and profitable opportunities. Bringing in an equity partner can often open up access to needed funds without incurring significant debt. Still, it’s important to note that potential equity partners will likely request financial projections and thorough due diligence before committing to a partnership, making it important to know and be prepared for the process.
Emphasize due diligence
Careful planning and research are essential in every aspect of business management, and financing is certainly no exception. Emphasizing and performing thorough due diligence on your lending options and common lending practices can help you avoid falling victim to predatory lenders while ensuring your organization is protected.
When conducting due diligence, be sure to consider the following:
- Interest Rates. Take the time to understand the interest rate terms thoroughly, and make sure you are crystal clear on the actual cost of borrowing.
- Payment Schedule. Seek out lenders that offer single, set monthly payments and be wary of loans that require payments based on sales. Scrutinize the fine print for any administrative fees associated with costs.
- Prepayment Penalties. Unethical lenders may charge penalties if you decide to pay the loan off early, while reputable lenders typically allow for early repayment or refinancing without such penalties. Also, consider lenders that offer flexibility in loan repayment terms.
- Application Process. While filing loan applications may not be your favorite thing, it’s crucial to be cautious of lenders with a quick and lax application process. A robust application process protects the lender and helps you assess whether the loan aligns with your business’s financial health.
- Reviews. Before committing to a lender, check their online reviews and assess their score and reputation through the Better Business Bureau. This can provide insight into other experiences with the lender and help you make a more informed decision.
Related: Inventors, Here’s How to Avoid Getting Ripped Off
Seeking financing for your business? Diligence is key
Being diligent and thorough in evaluating lenders and loan terms helps protect your company from predatory lending practices, allowing you to avoid costly financing programs while securing the money you need to support and grow your business.
Additionally, exploring non-profit lenders like CDFIs, government-backed loan programs (such as SBA loans) and even equity partnerships can provide viable financing alternatives that help you steer clear of fraud, scams and practices that put your business in a bind. Paying attention to due diligence factors like interest rates, payment schedules, prepayment penalties, application processes, customer service and reviews can also help you avoid predatory lenders and make informed financing decisions that empower growth and success down the road.
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