Despite an increase in the number of sources of loans for starting a small business, most people still prefer the old-school approach of applying through a bank. While banks are a good source of funding, there are a lot of other alternatives that may be more affordable, more cost-effective, and less time-consuming.
Here are nine popular methods of getting a small business fund:
Self-Financing
If you have enough capital at hand, self-financing is an option that may be available to you. You can self-finance your business by taking out money from your savings account or selling other liquid assets such as stock shares. Sometimes, you may also raise capital by selling your car you’re not using. Real estate is another option which can offer instant cash to start your business.
Borrowing from your credit card is yet another form of self-financing; however, you’ll need to pay high interest rates, which will remain a liability until it is paid off. Taking a loan against a real estate you own is another idea. For instance, you may take a loan against your home. If you’re still paying a mortgage, many lenders will require you to have at least 20 percent equity in your home.
Self-financing your business requires you to take on all the risk. Be careful, and be sure not to invest too much of your money. Investing 10 to 15 percent of your capital is reasonable.
Bank Loans
Bank loans are a reliable source of capital. Bank loans are most suited to individuals who have an excellent credit history. The advantage of getting a loan from the bank is paying relatively less in interest compared to other forms of financing.
If you think your credit score is reasonably good, but your bank may be reluctant to give you a good interest rate, you can always use your real estate or car as collateral. Cars, real estate, and gold are types of collateral accepted by the banks.
Other options to take out small or short term loans are from cash advance sites like TurboPaydayLoans.com usually they have higher chance of funding however APR might be something to think about.
Friends and Family
Borrowing from people you may know is sometimes the best option as these individuals will not ask you to pay high-interest rates at stringent terms. Before going to a family member for help, remember the risk associated with such borrowings. If you’re unable to pay the loan or you consistently delay payments, your relationship will suffer.
In such cases, the best thing to do is to communicate clearly and document everything as if you were using a real lender. That way, if there are disagreements at any point, you will be able to go back to the original documentation and hopefully resolve the issue without an altercation.
SBA Loans
The Small Business Administration actively gives loans to those requiring help in setting up a business. The average loan is more than $100,000, and the rate of payment is also very reasonable. As you can guess, any such loan will come with a background check and financial scrutiny.
To apply for SBA loans, you shouldn’t have a criminal background. After taking out the loan, if you’re incarcerated or indicted for a felony charge, the SBA will not back up the loan, which means that you will likely get into more legal trouble.
Overall, SBA loans are a great option to kick-start your business because you can also apply for micro-loans of less than $50,000 for purchasing office furniture, supplies, inventory, and equipment.
Venture Capital
Venture capital firms mostly invest in businesses that can propose a unique idea and convince investors that the idea is lucrative enough to generate cash. If you have a unique business concept, it may not be a bad idea to approach a venture capital firm to invest in your business.
Most venture capital firms will not invest in a startup. As suggested, you should already be running a profitable small business to attract a venture capital fund.
Angel Investors
While venture capital firms mostly prefer established businesses, there are a lot of wealthy individuals looking for anyone with a great idea. In return for the investment, these individuals ask for a certain stake in the underlying business.
If you have a solid idea, it may not hurt to look for an angel investor who may also give you the required expertise in launching a successful business. Most angel investors prefer to invest in industries that are thriving.
Crowdfunding
Crowdfunding is a solid funding source for entrepreneurs. It works by putting your business idea in front of millions of investors. Crowdfunding platforms allow followers to pledge investment in return for a financial or physical benefit.
Well-known crowdfunding platforms can offer quick results as thousands of potential investors may be willing to share their capital with you. The only downside to such effort is the possibility of failing to meet the deadline of raising funds. For instance, if your goal is to raise $100,000 in three months, the crowdfunding platform may return the pledged cash to investors if the goal is not reached.
Not all platforms work on the same principle, but you need to make sure that you can generate enough publicity and interest to raise the needed capital.
Peer-to-Peer Lending
Recently, P2P has become one of the most favored sources of funding small business projects. Just like crowdsourcing platforms, the borrower puts a request on the portal along with a proposal of how they will manage the cash. Investors review offers and pledge various amount of cash to the project.
Once the borrower agrees to the desired loan, the funding is transferred to the borrower’s account. Loans are paid back in installments over a number of years or as agreed between the borrower and other parties.
Incubators
If you have a good business idea and you’re also a good presenter, applying for investment through an incubator is a reasonable idea. These incubators are run by venture capital firms, government agencies, and universities looking for bright minds and top-end entrepreneurs who can succeed.
Instead of blindly applying to an incubator program, experts suggest that it’s better to talk to someone in the program and show them your business idea. Doing so will vastly increase your chances of selection as the insider has experience and know-how of what kind of programs a certain incubator is looking for.
There is a lot of competition to get into a program, but right contacts can help you deliver the message to the right people.
Irrespective of what funding channel you are aiming for, it is imperative that you have a solid reason to get investors interested in giving you a loan. As a first step, make detailed visual presentations to show others that you really understand your business.
Once everything is in a nice presentable format, get some help from an expert in projecting your cash flow because most investors will not even look at the presentation without a realistic financial plan. If you have a good plan, you may be able to get people interested in your offer.
