When it comes to financing your new business, today's options are virtually limitless. But which one is right for you?
When it comes to financing a small business, the options are virtually limitless. Though they vary in difficulty to acquire, the variety of services available today mean funding your dream is more than possible.
While most people think about standard bank loans, the reality is that there are dozens of other methods—most of which are more favorable than a traditional bank loan.
Let’s investigate some of these different funding options to give you a better feel for what opportunities exist.
1. Traditional Bank Loans
One of the first places most entrepreneurs start is with a bank loan. This is considered the traditional financing route and involves setting up a meeting with local banks—preferably ones you already do business with—and talking to them about their small business lending practices.
If a bank offers lending options to small businesses, they’ll ask you to fill out a loan application. From start to finish, this process can take anywhere from a couple of weeks to two or three months. If time is of the essence, it should be your goal to be as meticulous as possible the first time around.
For those who have never filled out a business loan application, don’t get worked up about the details. Most loan applications will start by asking you for basic information about the business, the legal structure, type of business you’re running, what products and services you sell, etc. You’ll also be asked for plenty of financial information and confirmation that you’re in good standing with the secretary of state (you pay your taxes).
Unfortunately, traditional bank loans just aren’t as practical as they once were. Many businesses are still wary of giving money to small businesses—especially brand new companies. There are also some downsides for business owners, as interest rates and requirements may be higher than other alternative options.
Related Article: What Should New Business Owners Expect When Requesting a Bank Loan?
You should never write off the option of self-financing. This is actually a popular method of financing for business startups and is a good place to begin. You’ll need to have a clear idea of what your assets are, including real estate, savings accounts, vehicles, retirement accounts and other investments. These all play a role in your ability to self-finance.
For those looking to self-finance, the most common option is getting a home equity loan on the portion of the mortgage that’s already been paid.
In this case, your bank will provide a lump-sum loan payment or extend a line of credit based on this amount. The great thing about these lines of credit is that they have relatively low-interest rates, and all interest paid on these loans—up to $100,000—is tax-deductible. The risk, obviously, is that you could lose your home if you’re unable to repay the debt.
Other self-financing options include borrowing against your 401(k) retirement plan or using the funds in an IRA. In most cases you can withdraw money from your IRA, as long as it’s replaced within 60 days. And lastly, you can always opt to save up and pay in cash.
3. Alternative Small Business Loan
With many banks unwilling or unable to extend small business loans, it may be necessary to look to alternative small business loans. The beauty of alternative loans is they’re backed by private companies that are able to make decisions independent of other organizations.
While you may not be able to secure a million dollar loan, many offer options ranging from just a few thousand dollars to as much as a quarter of a million dollars. “You receive a lump sum up front and you have a manageable remittance each business day that consists of a fixed dollar amount—which is more cash flow-friendly than a monthly obligation,” writes Credibly, a leading source of alternative loans.
The primary benefit of these loans is the flexibility. Many lenders put tight restrictions on loans, which inhibits a business’ ability to use the cash when they need it. Alternative lenders take a more personal approach, which sometimes allows for a smoother experience.
It may not have seemed practical five or six years ago, but crowdfunding is actually a very popular form of financing in today’s market. And while it’s difficult for most businesses to gain traction via crowdfunding—especially if your products and services aren’t sexy and millennial-friendly—the potential benefits are huge.
Websites like Kickstarter let you start a campaign, set a financing goal, and offer small rewards to people who give. The best part about crowdfunding? The money is all yours. You don’t have to give away equity or even repay the money. There’s a whole science to raising money via crowdfunding sites, though. Check out this business guide if you’re interested in learning more.
Related Article: 6 Crowdfunding Tips to Attract Investors (And Their Money)
5. Product Presales
One of the most overlooked methods of financing involves the selling of products before your business launches. This is referred to as product presale financing and can be done in certain situations. The product has to be fully developed, though. Attempting to presale products that aren’t ready for the market can be dangerous for the future of the brand.
Bittylab, a company that sells breastfeeding accessories, is a perfect example of the practicality of product presale financing. The company was able to raise $50,000 in a matter of two weeks, prior to the company’s actual launch. This $50,000 immediately went back into the business, increasing the value of the company and eliminating the need to take on debt.
6. Friends and Family Members
While most people say it’s a bad idea to mix your personal life with your business life, friends and family members are often a flexible and convenient option for financing.
According to one poll, five percent of American adults have provided funding to someone starting a business in the past three years. Most commonly, people extend financing to a friend or neighbor, close family member, relative or work colleague. If you do decide to ask friends and family members for financing, it’s important to have a strategy and avoid pressuring them.
7. VC’s or Angel Investors
Angel investors and venture capitalists are always good options, but not every business is able to meet their stringent requirements. Angel investors aim for helping companies in the very early stages of growth and expect to get a 20 to 25 percent return on their initial investment.
While angels are willing to help new businesses grow, venture capitalists only work with businesses that can prove they have steady revenues pouring in. They typically put a five-year time frame on recouping their investment and don’t have time to coach or spur growth themselves.
Explore All of Your Options
The issue for many entrepreneurs and business owners is that they don’t consider all of their options. They hone in on a single financing option and spend all of their time and energy trying to make that method work. By opening your eyes up to all of the options above – and it should be noted that many more exist – you can increase your chances of securing favorable financing.