SCORE Small Business Blog

Alternatives to Traditional Borrowing
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In the event that a bank turns down a loan, we have to explore other methods to accomplish our goals.  At this point, it is important to examine the reason for the original loan application, as well as the reasons for the bank declining the loan.  It is important to discuss the reasons for the bank declining the loan with the banker, understanding the banker may be reluctant to be candid with us.  Obtaining a loan was the most direct means to accomplish our project.  It is now necessary to consider alternatives that will require more time and patience.

Some of the reasons for a bank’s refusal would be as follows:

  • Operating performance is below bank lending standards
  • Bank policy does not provide for start-up loans
  • Inadequate collateral
  • Do not lend to fund operating losses or for personal income.

Alternatives may include:

  • Consider renting or leasing equipment necessary for a specific job vs. borrowing.
  • Consider alternative funding sources.
  • Earn and save our way to self–funding

Renting equipment, especially in the construction industry, is a good alternative, because it is often needed only for the short term.  Leasing equipment also has its advantages for the longer term, as a lease is dedicated to the equipment, and does not tie up any other funds of the company.

Next, we may wish to consider other funding sources – the three F’s – friends, family and fools.  Have you made a list of family and associates that may have the capacity and interest in investing in your venture?  Are you reluctant to ask family because of the implications of failure?  If you do investigate these resources, be certain to get agreements in writing and to make full disclosure of the risks involved – it will save heartache later.

Have you investigated whether you are a candidate for “angel” investors or even crowdfunding?  Angel investors are, as a group, sophisticated investors looking for investment opportunities with above average returns.  Consequently, to investigate this alternative, you need to be well prepared and understand what you are willing to give up (such as an equity stake or part ownership) or pay for the funds.  Crowdfunding is where entrepreneurs combine social networking with project fundraising, which involves creating an account, a funding target, a project description, and “perks” to entice people to contribute at various levels – perks often being something non–monetary.  People make contributions simply because they like your project or for the perks.

Finally, if all else fails, we must fall back on the time honored way of earning, and saving our money to accomplish our goal.  We will want to determine cash flows at the existing rate.  Then, a discipline has to be exercised in setting aside a cash reserve.  It is important to examine your margins and raise them to the max and yet stay competitive and to adjust them on an ongoing basis.

Use purchase agreements with suppliers that yield both a price reduction and timely cash releases.  Blanket orders with release dates are a perfect way to minimize inventory values.  This procedure has become known as “just-in-time delivery.”

There must also be a strong cost reduction effort.  Cost reductions are designed to increase overall efficiencies.  Increasing cost efficiency goes right to the bottom line.  Cost efficiency can adjust the margins that in turn would make pricing more competitive.

In conclusion: Rushing to the bank is not always the best idea, methodical thinking, and patience may win over the panic with more favorable results.

Dale JohnsonMentor, SCORE Southwest Florida
Within 2 years of becoming a SCORE mentor, Dale took over the workshop program of his local chapter and was elected Chapter Chair. His career included upper industrial management, industrial sales management, and owning three different small businesses.
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