Can't Get A Bank Loan? 8 Other Ways To Finance Your Business
With a good proportion of my peers having been laid off or facing the possibility of getting axed sometime soon, many people I know are seriously pondering the possibility of starting a business. The thing is, a lot of businesses take time and money to run. I've got a little experience in this area, having started an online business with my spouse that so far has taken over two years to build, and tens of thousands of dollars to finance.
The reality is that starting a business can easily become a money pit. So for those of you thinking about launching a new venture, what financing options do you have? Well, there's the possibility of taking out business loans from your local bank, of course. But what if your bank has turned you down? Let's consider a few alternative financing options in case you're unable to get the money you need from your bank. Many would-be enterpreneurs cobble together various sources of funding to make things work. Now not all strategies are a good idea -- so here are some options, along with my opinions of each approach:
No Bank Loan? Alternative Financing Options For Your Business
I offer 8 possible ways to finance your business, with the first four methods as my preferred approaches. I'd personally avoid the last 4 options due to the financial and personal risks they bring, but your mileage may vary.
Do you have enough bulk in your savings account? The way we financed our business involved having us build our savings for a significant period of time, and allocating some of that savings towards our business plans. If you're thinking of going into business for yourself, then work to save money towards that goal, way before you even put your plans into action. I know of people who've decided to raid their emergency funds to feed their ventures, after ensuring that they could rebuild their emergency fund account over time. But be careful about this approach since it will probably take you a while to build back your savings as you focus on nurturing your venture. Personally, I wouldn't touch my emergency fund for this purpose unless I was sure that I had the cash flow to replenish any savings lost as quickly as possible.
2. Peer to peer lending network.
Have you heard of peer to peer lending and borrowing? This process involves borrowing money from strangers, all of whom belong to a lending network. This is simply a formalized network that pools the financial resources of people together in order to help fund someone's "project" or enterprise, whatever it may be. For more information on these services and networks, check out my Lending Club review, Kiva review and Prosper coverage.
3. Venture capital or angel funding.
If you've got a compelling business idea, you may be able to find funding for it through "angels" or venture capital, who usually have the deep pockets to offer you a substantial investment for a piece of the equity. During the dot com boom, it was quite easy to get funding through this method, but it's no longer the case during this drawn out recession. So if you can get the bucks this way, consider yourself lucky!
4. Bartering methods.
Instead of financing your business with money, why not look to barter services with others who can help you with your projects? For instance, you may have technical skills while someone else has the marketing chops. To get your business off the ground, you may want to trade services with other small business owners who are willing to share their skills with you and vice versa.
5. Funding from friends and family.
Certainly, you can always hit up your relatives and friends for the money. It's usually the case that you'll find your first fans and supporters from your own circle, so they may be the first people you end up approaching for financing. But going this route can have its pitfalls, since doing business with those people you have close relationships with can become complicated, especially when things don't turn out well. Unfortunately, many an entrepreneurial venture will end on a sour note (as they say, 9 out of 10 businesses eventually fail) and can bring down along with it, your ties with your familial investors. The conventional advice here is to keep your social and business relationships separate, and not to mix business with family, unless your family is willing to work with you on a completely professional level. If you decide to accept money from your loved ones, make sure you have a contract and that you treat anyone who puts money into your venture as professionally as you would any business partner or investor.
6. Credit cards.
Many entrepreneurs I know have hit up their credit cards for the funding they need. The thing is, they charge everything and anything to their rewards credit cards. This isn't a good idea unless you're able to pay off your balance in full each month or unless you can prevent your debt from escalating. When my spouse started his first company right out of college, he ended up carrying credit card debt for a long while. We ended up retiring this debt after 3 years only after we married and were able to pool our financial resources together. Credit cards are an easy source of financing, but I'd be careful to take out a large amount of debt this way, given the high interest rates you'll end up paying over time.
7. A HELOC or home equity loan.
You may get a better rate by using a home equity loan or HELOC to fund your business, but putting up your home as collateral is a big risk, again, given the rate of failure of businesses. This is something I wouldn't try.
8. Borrowing from your 401k.
Are you tempted to borrow from your 401k? Just like borrowing against your home, this is another source of financing that can be cheaper than many other channels, but it's also pretty high risk. You can end up potentially owing the government taxes as well as penalties, if you are unable to repay your loan according to the rules that govern these retirement plans (within 5 years or less).
Starting your own business is a huge step, since it takes a lot of risk, time, energy and in most cases, a certain amount of money to proceed down this path. I'd weigh the risks of running a business very carefully, before I decide to commit money to any venture using various financing channels. If you were to launch a business, how would you go about it?