9 Ways to Creatively Finance Your Small Business

ByTop10 StaffJul.19, 2018

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 Startup Funding
You have a great business idea. You’ve done the research, drawn up a business plan, and chosen the perfect name for your company. Now comes the hard part: financing.

According to a recent US Bank study, lack of money is a cause of almost 4 in every 5 small business failures. Business loans are an obvious source of funding, but the good news is there are many ways of financing your small business venture.

1)Your Assets

ProsCons

Low interest rates

Risk of losing property in event of default

High loan amounts

Debt accumulation

Predictable fixed-rate interest payments


If you own a valuable asset, you may be able to use it as collateral to secure a low-interest, flexible loan. The most obvious examples are a Home Equity Loan (HEL) or Home Equity Line of Credit (HELOC), in which you use your equity or a portion of your equity in your property as collateral. You can also use a vehicle, equipment, or bank savings as collateral for a secured business loan. By using your home or another asset as collateral, lenders are willing to take on a higher degree of risk than for an unsecured loan.

2) Lines of Credit

Kabbage provides lines of credit of up to $150,000 for any business expense. The terms are easy to understand, and there are no hidden fees. BlueVine provides flexible credit lines ranging $5,000 to $2.5 million. It only charges fees when you withdraw money for your business. 

ProsCons

More flexibility than business loan

Variable interest rate

Withdraw funds on per-need basis

Collateral for higher amounts

Only pay interest on what you borrow

Accumulates debt, just like a loan

A business line of credit allows you to borrow up to a certain limit and only pay interest on the amount of money you actually borrow. Most lenders offer borrowers the flexibility of drawing on their line of credit on an as-needed basis. Small lines of credit of up to $100,000 are usually unsecured. But if you’re approved for an amount of more than $100,000, you may be required to put up collateral.

3) Online Lenders

Lendio is an online small business loans marketplace that brings business owners and lenders together on one platform. The site is free to use and offers more than 10 loan programs for every business need.

LoanBuilder offers customizable short-term business loans, giving borrowers the freedom to design their loans according to their specific needs and circumstances.

ProsCons

Quick application process

Increases debt burden

Low rates and fees

Failure to make payments can hurt credit score

No need to go to physical location


Online lending services are a popular alternative to traditional bank lending. They offer speed, ease, and convenience. It typically takes less than an hour to complete an application (not to mention the time saved not having to get in your car and meet your lender face-to-face) and approval is usually granted within a few days.

4) Angel Investors

ProsCons

Favorable terms

Giving up portion of equity

Mentoring role

Relinquishing control over strategy

Not a loan

Other strings may be attached

An angel investor is a wealthy individual who makes a one-off investment in a startup in return for equity or convertible debt. Unlike venture capitalists, angel investors invest their own money rather than other’s money. According to the US Securities and Exchange Comission (SEC) guidelines, an angel investor must have a minimum net worth of $1 million and earn annual income of $200,000 or more.

In recent years some angel investors have organized themselves into angel groups or networks. The typical angel investor is a friend, relative, or mentor of the business owner.

5) Friends and Family 

ProsCons

No interest or low interest

Risk of damaging relationship

No need to apply to a lender

Prospect of relinquishing some control over business

Quick and easy


If you have a close friend or relative with spare cash, you might want to consider asking them to lend you some money to help start your business. Borrowing from a loved one can save you the hassle of going to a lender and the cost of paying back interest.

But be careful: while your loved ones might embrace the prospect of helping you with your business venture, failure to repay them could damage your relationship.

6) Credit Cards 

ProsCons

Easy application

Increases debt burden

No-interest introductory periods

Missed payments can damage credit score

Cash-back and rewards points

Expenses can spiral out of control

Credit cards are a viable source of funding for small businesses that are just starting out and need quick access to a small amount of funding. Some credit cards offer no-interest introductory periods, making them a good option for handling initial expenses without accumulating debt.

If you’ve just opened your business and want to build up credit before applying for a formal loan, taking out a credit card and meeting your monthly payments is a good way of achieving this.

7) Micro Loans

ProsCons

Useful for businesses with little capital

Rates often higher than traditional banks

Prioritize women and minority groups

Missed payments can affect credit

Quick processing


Microloans are loans of up to $50,000 issued by individuals or micro-lending institutions instead of banks and credit unions. They are designed to help small businesses with limited credit history and capital.

Some microlenders lend money specifically to women, minorities, low-income applicants, or other groups perceived as being at a disadvantage with traditional lenders. The Federal Government’s Small Business Administration (SBA) runs a program to help match businesses with microlenders. Some peer-to-peer (P2P) lenders also match borrowers with microlenders.

8) SBA Loans 

ProsCons

Backed by Federal Government

Lengthy application process

Low payments

May require collateral

Low interest rates

Good credit required

The SBA supports more than 800 partnering lenders, community development organizations, and micro-lending institutions by reducing their risk and making it easier for them to access capital. It operates Lender Match, a free online tool that connects small businesses with SBA-approved lenders.

SBA-guaranteed loans can be used for most business purposes, although lender terms and requirements may vary. Only for-profit businesses located in the United States can qualify for an SBA loan. The business owners must have invested their own time and money in the business and must have exhausted other financing options.

9) Social Lending

Lending Club is among the leading P2P lenders, offering a streamlined application process with approval in minutes and funding within a few days.

ProsCons

Easy application process

Low credit can affect your interest rate

No prepayment penalties

Missed payments can hurt your credit score

No collateral


Social lending or P2P lending is a form of financing offered by sites like LendingClub that matches borrowers with individuals interested in funding them. Another type of social lending is crowdfunding, but instead of paying interest on the loan, the business owner typically gives the investor an equity share or sends them a product in return for the investment.

Summary

Financing can be the most stressful thing about running a small business, but the good news is that there are many options out there. For some businesses, a loan from a conventional or online lender might be the best option. But if you prefer not to take a loan or you simply don’t meet the requirements of traditional lenders, there’s no shortage of creative financing options for you to explore.