6 Non-Traditional Ways to Fund Your Small Business

07/14/2015 05:27 pm ET Updated Jul 13, 2016

Only about 20 % of small businesses that applied for a bank loan last year actually got approved according to the Biz2Credit Lending Index . Many business owners get rejected for a bank loan because they have low credit scores or haven't been in business long enough. Small business owners, ever resourceful, have figured out other ways to finance their businesses.

Here are 6 atypical but effective ways to fund a business. Even better, some of them can be used to fund a startup.

(The author's company, Fit Small Business, has a business relationship with several of companies mentioned in this article including On Deck, Kabbage, Lending Club and Fundbox.)

1. Peer2Peer Loans

Approval Requirements: Personal credit score above 620; at least 18 years old with US bank account
Pros: Provides funds from 3 to 5 years at interest rates typically around 15%.
Cons: Costlier than a bank loan (APR of 5-30 %).

Peer2Peer lenders such as Lending Club connect borrowers and lenders in an online marketplace. Borrowers like it because they can bypass the bank and "talk" directly to individual investors. P2P lenders like Lending Club offer consumer loans of up to $35,000 which can used for business purposes. Alternatively, P2P lenders also offer business loans if you're seeking larger amounts of capital.

If you're a brand new startup, consider crowdfunding, which I like to think of as the hip sibling of P2P loans. Crowdfunding sites like Kickstarter don't provide loans. Rather, they allow you to raise small amounts of money for a project or venture from a large number of investors. You must typically provide some benefit (e.g. free merchandise) for the investor, sometimes including equity in your company.

2. Short Term Working Capital Loans

Approval Requirements: Personal credit score above 500, 1 year in business, and >2,500 in monthly revenue
Pros: Very Quick; Easier to qualify for than a bank or P2P loan
Cons: Costlier than a bank loan or a P2P loan (APR of 40-80 %)

Short-term lenders are claiming a growing share of small business lending. They specialize in providing working capital loans with 1-24 month terms. Application and funding are completely electronic, so you can get a loan in as little as 1 business day. Business owners with lower credit scores can qualify with a short term lender, but they are not designed for startup businesses. You should have a track record of at least one year and be a profitable business. Learn more about quick approval loans here. Leading short-term lenders include Kabbage and On Deck.

3. Invoice Factoring

Approval Requirements: Must invoice other businesses or government customers.
Pros: Relatively easy to qualify for; works like a line of credit; can be used to cover gaps in cash flow
Cons: Can be expensive (APR of 25-60 %); some factors will contact your client (this is not the case with Fundbox or BlueVine).

If you are a B2B or Business-to-Government business, consider invoice factoring as a way to fund your business. An invoice factor will advance you capital in exchange for unpaid invoices. It's a great way to plug holes in your cash flow that are created while you wait 30, 60,or 90 days for your customers to pay you. Even better, invoice factors offer lines of credit that you can keep borrowing against as your invoices are paid. The exact approval requirements vary based on the provider, but most don't require a long business history or a great credit score.

4. Merchant Cash Advance

Approval Requirements: Must have a high volume of credit card sales.
Pros: Quick approval process and no personal guarantee of repayment if the business fails.
Cons: Very expensive (APR 80-100 % +)

A merchant cash advance is a lump sum of capital that's given in exchange for a share of your daily credit card receivables. Ordinarily, a merchant cash advance is very expensive with APRs over 80 %. If you have exhausted more affordable options and have no other source of capital, then a merchant cash advance may be the way to go. In addition, the payments companies Square and PayPal offer more affordable merchant cash advances for their merchants.

5. Use Retirement Funds

Approval Requirements: Hold an eligible retirement account
Pros: No early withdrawal or income tax penalties; can be used to funding a startup, buy a business, or to get working capital
Cons: Puts your nest egg at risk

Some business owners tap their personal retirement account to fund their business. There are two different ways to do this.

The first is called a Rollover for Business Startups (ROBS). This is the best option if you've saved at least $50,000 in your retirement account and need at least that much capital for your business (note that Roth IRAs are not eligible for a ROBS, but a traditional IRA is). It basically involves setting up a company-sponsored retirement account and rolling over your personal retirement funds into that account. Since it's a rollover, you won't have to pay any early withdrawal penalties or income taxes. A ROBS costs about $5,000 to start and $1,500/year on a continuing basis. There are lots of companies that can help you set-up a ROBS. Here is a comparison of ROBS providers.

The second way to use retirement funds is to take a loan from your 401(k) plan or other eligible retirement plan (Roth and traditional IRAs are not eligible). A plan loan lets you borrow up to half of your retirement account balance, with a maximum of $50,000. The interest rate on a plan loan is often lower than rates on standard bank loans, and you actually pay back the principal and interest to yourself.

Both a ROBS and a plan loan are cheaper than a lot of other business loan options. However (and this is a big however!), if your business fails, your retirement savings are on the line. You need to carefully evaluate the risk and decide if it's worth it for you.

6. Credit Cards

Approval Requirements: Should have credit score >600 to qualify for a good credit card
Pros: Quick and convenient; relatively inexpensive compared to other financing options with an average APR around 16 %
Cons: Limited to credit line

A lot of business owners charge essential business expenses to a credit card. Compared to short-term loans, invoice factoring, and merchant cash advances, a credit card is actually a pretty inexpensive form of financing! The APR is around 16 %, and a credit line can be used in almost any setting until you hit your credit limit. Bonus: you often earn rewards points or cash back for charging expenses to credit cards.