In business, dreams are easy. Finding the money to make them happen, however, can be difficult.
Even established, successful businesses can get turned away for loans at banks. This was the case for Sole Bicycles, a popular maker of stylish, high-performance bikes based in Venice Beach, California.
With the busy summer season approaching, they sought a bank loan to expand inventory. The last thing they expected was to be rejected more than 20 times over the following two years.
"No bank was willing to work with us, and we missed opportunities as a result," said Sole president Jimmy Standley.
His experience is all too common. According to the Federal Reserve's latest Small Business Credit Survey, nearly one in two small businesses say they struggle to get the funding they need.
Fortunately, over the past few years a new option has grown to fill that gap. Online lending platforms connect businesses looking to borrow with investors looking to lend. It's a fundamentally different business model than banks, said Sam Hodges, co-founder of one such platform, Funding Circle.
He explained that the lending platforms use technology to connect credit supply directly with demand, making it easier and faster for businesses to get affordable loans. Funds come from a community of individual and institutional investors.
"It's not uncommon for businesses to wait weeks to hear back from banks after applying for a loan - just to be denied," Hodges said. "Once we have everything we need, we're able to make a decision in as little as 24 hours."
When borrowing online, buyer beware
When considering an online lending platform, it's important to look carefully at what you're being offered, Hodges said.
He warned that borrowers should beware of lenders who promise approval virtually instantly, without taking the time to learn about how much each applicant can really afford. Loans from these lenders can come with murky terms and upwards of 70 percent annual percentage rates (APRs). Additionally, these lenders may take payments directly out of your sales daily or weekly until the debt is repaid - which could drastically reduce your cash flow.
"Term loans are the better option for established businesses looking to borrow a set amount of money for a specific purpose and pay it back over time," Hodges said. "These are ordinary Main Street businesses across America simply looking to open a new location, hire more staff, stock up on inventory or refinance debt."
This includes Standley at Sole Bicycles, who ended up applying for a second Funding Circle loan as his company continued to grow.
Thinking about applying for a loan? There are five things business lenders typically care about. Read more at Made2DoMore.com.