About 10 to 15 years ago, the usual way to get starting funds for your business was to take out a loan from a bank. This was the tried-and-true method in acquiring capital, but not many entrepreneurs could fulfill the stringent requirements of getting a bank loan. It doesn’t help that these days, traditional banks are cutting back on loans for small businesses. So what’s a small business owner to do?
Well, you can try these five alternative funding sources.
Business Line of Credit
This type of financing is an unusual but popular way of small business financing. It’s a revolving fund from which you can withdraw money when you need it, and you pay it back regularly. It is very helpful for small businesses in maintaining their cash flow as it gives them a stand-by fund they can use to pay suppliers and employees’ salaries, buy or upgrade equipment, and as an emergency fund for unexpected events. Many large banks and community banks offer a business line of credit, like this one in Utah.
Angel Investor Networks
An angel investor is an individual or group of individuals that invest in businesses, usually by buying a stake in the enterprise. Apart from money, these angel investors offer expertise and guidance to help you sustain or expand your business. Getting angel investors can be difficult, as they can be very demanding—they ask for a solid business plan and an exit strategy. The exit strategy means getting their money back with some profits. Often, they’ll also ask for a 3-5 year deadline for a return on their investment, including profit.
Yes, you can also use your personal credit card to finance your business and manage your cash flow. You may use your credit cards to pay suppliers, and even earn rewards by doing so. You can also take out cash advances on your credit card for payments, but do it only as a last resort. The downside to this is it directly impacts your credit score.
If your business has been running for at least six months, you qualify for the services of a microfinance lending institution. Their microcredit loans have no collateral but come with high interest to minimize the risk of default. Don’t be fooled by the “micro” prefix; the loans range from $1 million to $10 million with a term of five to 25 years.
Friends and Relatives
If you’re fortunate enough to have prosperous and generous friends or relatives, you may ask them for loans. Better yet, you may invite them to put in money and come in as silent partners in your business, or make them co-incorporators and give them shares equal to their investment. This option, however, is a double-edged sword. If the business fails, your relationship with them could suffer as well, and you could end up severing ties. Before taking any money from them, make sure you’re willing to risk your relationships with them for the sake of keeping the business open.
Having friends or relatives as silent partners may also make them believe they can interfere with the way you operate your business. Have a lawyer document the terms of their involvement to draw the line. Also, you must make it clear to them that they should only invest money they can afford to lose.
Starting a small business is a good thing, but capital and overhead costs will always be a problem if you don’t have enough money to tide you over the first few years. While bank loans, peer-to-peer lending, and other financing products are available to most large companies, small businesses can turn to these alternative fund sources to stay alive.