The Draw Backs to Non-bank Business Financing

As you probably already know, all entrepreneurs need some type of financing to get their business off the ground. It doesn’t really matter whether you’re looking for a few thousand dollars or several million dollars to turn your business ideas into reality. You need funding and you need it quick.

The problem with bank financing is the fact that you have to jump through many hoops. I wish that these hoops were just simply discretionally. I wish they were just particular to the specific bank or the personalities behind the bank.

If that was the case, then you’re in luck. Why? Given the competitive nature of business bank financing, there is bound to be some bank who will give you the terms you’re looking for. It’s only a matter of time. You just have to shop your idea from bank to bank and eventually, somebody would see the wisdom or the magic of your business plan to bet on your dreams.

Unfortunately, it doesn’t work this way. We still have to work with a baseline set by the US federal government. Accordingly, depending on the type of business you have as well as your initial base of resources, bank financing may be out of the question.

I don’t say this to depress you or to discourage you or somehow, someway dissuade you from following your dream. I’m just giving you a reality check. I am, as they say, just keeping it 100. With that said, there are non-bank business financing options available. You can take out loans from family members.

Please understand that this is not as far fetched as it sounds. You have to remember that interest rates paid out by banks on deposits, whether through certificate of deposits or time deposit instruments are still very low. You’d be lucky to find a bank that will give you 4%. Think about that for a second.

Inflation is bordering around that rate. In other words, your money’s not really growing. On top of that, you have to pay taxes for that interest. Talk about a non-starter. Make no mistake about it. It’s a bad idea to put your money in the bank and hope to live on the interest because there is none. After all the taxes and opportunity cost have been taken out, you basically are not making any money.

From the perspective of potential lenders, this is a golden opportunity because they’re looking for local businesses to lend to who would pay them a higher rate of interest than they would get from a bank. If you can pay more than 5%, you’d be surprised as to how many people would love to sit down, go over your business plan with you and hand you cold, hard dollar bills. Sounds awesome, right?

Well, please understand that you have to make sure you follow the law. There are several state laws that govern private investment. You have to make sure to be clear with these individuals whether they’re getting into an investment or they’re lending you the money.

Personally, I would stick with lending because lending rules are pretty straightforward. They’re easy to cross reference, also there’s less likely of a law suit because your obligations are fixed. There is no gray area unlike an investment especially when you include convertibility features into your funding arrangement.

So, keep this in mind. Generally speaking, non-bank business financing is a good idea, but you don’t want to step into a trap. Make sure you are up to speed with local lending rules, also pay attention to stock or securities offerings. You might actually land in very hot legal water if you play fast and loose with these local securities laws as well as federal security’s laws.