The odds of running a successful startup business are often lined against you because traditional banks will not easily extend credit to you. When starting, you will realize that your savings aren’t enough to get you through all the initial set up processes. Therefore, you will have to find alternative and affordable sources of funding.
As a result of the high demand for alternative financing, entrepreneurs and investors have set up means through which you can access funds. Fortunately, most of these options are available online and you will easily get your loan approved within the comfort of your home. The available options include:
- Loans from Peer to Peer (P2P) lenders
First of all, you should realize that you aren’t the only one facing financial crises. Second, there are people with money and they are willing to lend you at an interest. This is their investment but the rates offered are favorable and lower than those availed by your bank.
In case you aren’t familiar with the working structure of P2P lenders, here is a brief of what they are. P2P lending institutions or clubs are online sites made up of investors willing to lend their money to you at an interest.
Since the lenders are strangers, the investors need to be assured that you can pay. Therefore, your credit score is important for loan approval. You must have a good credit, above 650 for the P2P club to lend you money. The interest rate charged ranges from 5 to 26% depending on your credit score.
P2P clubs are affordable as they charge an origination fee ranging between 1-6%. The loans extended to you mature in between 3 to 5 years.
- Retirement money
Did you know that the money you have in your retirement account can be used to fund your startup business? This money is referred to as the Rollover As BusinessStartups (ROBS) and you’ll need a highly experienced professional to help you in processing the request. The professional will help you set up your business without having to incur disbursement taxes or penalties.
ROBS are packaged in a way that you appear to be buying stock in your company using your 401K funds. It is important to note that your company must be registered as a “C” corporation for you to benefit from ROBS.
- Raising money from angel investors or venture capitalists
Though called angel investors, they won’t give you their money without asking for something in return. Venture capitalists see potential in your business and are willing to invest their money. They expect a percentage of the company’s ownership. This is a great source of funding for businesses that are unique and successful even though young. To raise money from venture capitalists, invest in your professional and business networks and structure the investment into a convertible loan.
Note that angel investors are wealthy individuals while venture capitalists are firms and companies. Determine the percentage of your company to be controlled by these groups and draw up papers. Before pitching your business to them, ensure that you have drawn up a business plan with detailed and accurate financial projections.
- HELOC – Your home’s equity
This is a great way of raising funds for your business. You can either have a home equity loan or a home equity line of credit. The home equity line of credit often offers lower interest rates compared to home equity loans.
How do you get the HELOC funding? If you are a home owner with more than 15% equity in your home, then you qualify for consideration of a HELOC loan. HELOC uses your home as collateral and if your stake in the home is above 15%, you will qualify for a loan of between 70 and 85% the value of your home.
HELOC loans are affordable because they provide you with capital to run your business while serving the loan at low monthly repayment rates. Unfortunately, you can lose your home if you default your payments.
- Credit cards
Did you know credit cards can actually help you grow your business? Who knew! A big number of consumers just like you have funded their businesses using credit card loans. Some of the benefits of using credit cards include the cards’ cost effectiveness, rewards and cashback programs, it can be a means of building business credit, and the cards are great debt consolidation tools when things aren’t looking too good.
To get the best out of credit cards, you should work on continually improving your credit by repaying your loans in time, increase the amount of credit, and apply for a business credit card.
- Try crowdsourcing
There is no shame in asking! This is a cost effective business funding strategy that could cost anything between 5-10% of the total amount raised. Just as the name implies, crowdfunding is a strategy that focuses on raising a large sum of money through small contributions from a number of people.
To get these people to contribute money to your business, they must buy your business idea. You should therefore sell it to them using an understandable but detailed business pitch. You will need an account in a crowdfunding website. You can offer shares or rewards to your supporters to incentivize them.
- Family and friends
Do your friends and family members like your business idea? Prepare a professional business plan with financial projections and present it to them. If they buy the idea, they will certainly invest in your business.
These parties and your potential investors may ask for some stake in your business in return of may give you their money as loans. To avoid disputes in future, all agreements and loans should be put on paper.
- Non-profit microloan lenders
These are relatively expensive, but they are suitable when you are out of options. For your poor credit ratings and the inability to get credit from other sources, you may opt for this!
In conclusion, these are just some of the available finding options for startups. You may also consider asking for funding from SBAs. Personal loans from non-traditional banking institutions can be used as well. With all these options, you don’t have a valid reason why your great business idea is lying somewhere. Be aggressive and take advantage of these financing or funding options.
Isabella Rossellini is a business credit counsellor with experience in debt management and debt consolidation. As a business writer, she analyzes loans and credit management. Learn more on her debt consolidation loans made easy blog.