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Sources of alternative lending for entrepreneurs, part 1

Being an entrepreneur is more than just coming up with a good business idea: It is also about putting that idea into action. Of course, this is much easier said than done. The majority of entrepreneurs will need the help of business loans to get their ideas off the ground. Finding an enthusiastic, loyal and deep-pocketed investor is an entrepreneur's dream, but is rarely a reality. Not to mention that roughly 85 percent of entrepreneurial loan applications will be rejected by community banks. So, how is a business owner supposed to find funding?

There are several alternative lending methods for small businesses. As with traditional lending sources, alternative lenders come with bonuses and limitations. We will use this two-part blog series to examine a few options for alternative loans.

1. Asset-based loans

An asset-based loan is a type of loan that is secured by business assets like inventory, equipment or other collateral. These loans can be tempting, but beware its major drawbacks: The cash conversion cycle can also send business owners into a spiral of borrowing. These loans also tend to be more expensive, as the lenders have an incentive to charge you the highest interest rate possible. The field of asset-based lending is unregulated, providing a breeding ground for unscrupulous lenders.

2. Revenue-based funding

With revenue-based loans, lenders can provide businesses capital up front in exchange for a percentage of the company's eventual revenue. This means that you won't have to sacrifice equity to obtain revenue-based funding, but you will have to sacrifice a sliver of your future profits. These loans can also get expensive, fast: In some cases, lenders may require a monthly minimum in revenue and a certain minimum gross margin just to consider investing.

3. Pawn loans

The nature of pawn loans is fairly self-explanatory: A business owner can exchange hard assets like gold or jewelry for a short-term loan, similar to how a pawn shop works. If you have a troubled financial history, this loan may be a good option because it does not require a credit check. You need only find a lender who is willing to hold your collateral and provide a loan. Pawn loans can provide fast cash, but beware missing a payment or misreading your terms and conditions--this could prompt your lender to keep your assets and profit off them himself.

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