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Financing a small business is tricky, whether it’s in the startup stage or an expansion phase. According to findings by USA Today, inadequate capital to operate and expand is the cause of 4 out of 5 small business failures.
While most business owners only think of standard bank loans when it comes to sourcing capital, the reality is that there are dozens of other ways to access funding. In fact, many of these small business financing options are more favorable than traditional bank loans.
Read on to learn about some of the best of these financing options. You’ll most likely find one that can work for your company:
1. Self-Financing
Self-financing is arguably the most popular way of financing small business startups. It’s a great place to start, although the method has its cons. Self-financing involves using a valuable asset that you own to secure a low-interest, flexible loan.
To finance yourself, start by evaluating the assets you have, including money in savings accounts, investments, real estate, vehicles, and more. Most people consider taking a home equity loan to access funds. You can also use any other asset as collateral for your secured business loan.
The main benefit of these loans is their relatively low-interest rates. But if you’re unable to pay the debt, you risk losing your property. And that’s a significant risk to take!
You can also borrow against your 401(k) retirement plan or use the money in your IRA account.
2. Alternative Business Loans
Many banks are unwilling to lend to small businesses, especially in their startup stage. Banks assume such companies to be high risk and see them as potential defaulters. And even when banks extend loans to them, it’s at very high interest rates.
Instead of traditional banks, consider looking for alternative small business loan sources. Alternative loans are backed by private companies, which are flexible and able to make decisions independently. Although you won’t get a million dollar loan like you could with a bank, you can get up to half a million dollars from an alternative lender.
The main benefit of these loans is their flexibility. Alternative lenders take a more personal and proactive approach with less tight restrictions than traditional lenders. For example, if you’re in the construction industry and want funds to complete your project, ConstructionLoanCenter.com can be a perfect source of financing.
3. Angel Investors
Angel investors are wealthy individuals who lend you money in exchange for equity or convertible debt in your company. If you’re in the initial stages of setting up your business, an angel investor can be an excellent source of capital. In some cases, an angel investor is a person you know well, such as a relative, colleague, or mentor.
An angel investor must believe in the future of your business to risk investing their money in your startup. Angel investors are different from venture capitalists in that they use their own money rather than other people’s funds. In recent years, some angel investors have come together to form angel groups that pool more investment funds together.
You can approach these angel groups and pitch your idea. If they like and believe in it, funding will come your way.
4. Credit Cards
Credit cards can be helpful in small business financing, but only when used correctly. If your business is kicking off and needs funds to keep it operational, credit cards can help with initial expenses without you having to accumulate debt (assuming you pay your credit card bills in full before interest kicks in).
If you make your monthly payments on time, you’ll build your credit score and increase your chances of getting better interest rates when you apply for a formal loan. But if you fall behind on your payments, your credit score will plunge and affect your future borrowing ability.
5. Crowdfunding
In recent years, crowdfunding has become one of the most popular ways of small business financing. It seemed impractical a decade ago, but today it has proven otherwise. While it’s difficult for most companies to gain traction on crowdfunding platforms, some do, and they benefit massively.
You can look to crowdfunding platforms like Kickstarter. You’ll need to pitch your business idea, state its goals, and promise rewards to people who contribute to your venture. If people are impressed, they’ll give funds to support your project.
The good thing with crowdfunding is that the money is not a loan. It’s all yours. However, it’s not easy convincing people to invest, and you need to learn all the tricks on how to do it right!
6. Product Presales
Product presale financing is one of the best ways to raise capital for your business. When you have fully developed your product, let’s say it’s a solar-powered bicycle; you can make presales even before launching. However, note that the product has to be ready for the market!
If your product gains traction in the market, you can use its presale cash to finance your company before the launch. You’ll won’t have a need for a loan. It’s a strategy that Elon Musk and Tesla used during their early production years.
7. Apply for a Microloan
If you have no credit history, collateral, or other option to obtain a loan from a bank, there are still options available. You can apply for a microloan – a small business loan in the range of $500 to $50,000. Microlenders can offer you these funds, and they need less documentation than banks.
Microlenders are individuals or non-profit organizations. They offer more flexibility than banks but often charge higher interest rates. There are several hundreds of these organizations across the United States.
Some microlenders give money to specific groups like minorities, women, and low-income individuals or groups. The Small Business Administration (SBA) has a program that matches businesses in need of funding with microlenders.
There’s More Than Traditional Bank Loans in Small Business Financing
If you can’t obtain a bank loan to fund your small business needs or expansion, don’t give up. There are plenty of small business financing options to consider, and you may find one that is even better than a traditional bank loan.
