Beyond the Bank Loan: 6 Alternative Financing Methods for Startups
Many aspiring entrepreneurs have an idea for their business but lack the capital to actually start it. Brand-new businesses are often turned down for bank loans, and even if your business is established, funds can still be tough to secure. Loans funded by the Small Business Administration are usually more accessible, but they are becoming increasingly competitive.
So what options are left for someone aspiring to be a small business owner? Here are six options beyond bank loans for financing your startup.
Online lenders have become a popular alternative to traditional business loans. These platforms have the advantage of speed, as an application takes only about an hour to complete, and the decision and accompanying funds can be issued within days. Because of the ease and quickness of online lending, economist and former U.S. Treasury Secretary Larry Summers said at the 2015 Lend It conference that he expects online lenders to eventually reach more than 70 percent of small businesses.
Visit Business News Daily's guide to choosing a lender here. [See Related Story: Can't Get a Small Business Loan? Here Are Your Options]
Editor's note: Are you considering a small business loan for your business? If you're looking for information to help you choose the one that's right for you, use the questionnaire below to have our sister site BuyerZone provide you with information from a variety of vendors for free:
Angel investors invest in early-stage or startup companies in exchange for a 20 to 25 percent return on their investment. They have helped to start up many prominent companies, including Google and Costco. Mark DiSalvo, CEO of private equity fund provider Semaphore said, "You are likely to get an investor who has strategic experience, so they can provide tactical benefit to the company they are investing in."
Find out what makes angel investors fund a business here.
Venture capital is money that is given to help build new startups that are considered to have both high-growth and high-risk potential. Fast-growth companies with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network and grow their company frequently.
Brian Haughey, assistant professor
of finance and director of the investment center at Marist College, said that because venture capitalists focus on specific industries, they can generally offer advice to entrepreneurs on whether the product will be successful or what they need to do to bring it to market. However, venture capitalists have a short leash when it comes to company loyalty and often look to recover their investment within a three- to five-year time window, he said.
Learn more about venture capital here.
Through this process, a service provider will front you the money on invoices that have been billed out, which you then pay back once the customer has settled the bill. This way, the business can grow by providing the funds necessary to keep it going while waiting for customers to pay for outstanding invoices.
Eyal Shinar, CEO of small business cash flow management company Fundbox, says these advances allow companies to close the pay gap between billed work and payments to suppliers and contractors.
"By closing the pay gap, companies can accept new projects more quickly," Shinar told Business News Daily. "Our goal is to help business owners grow their businesses and hire new workers by ensuring steady cash flow."
Visit BND's guide to choosing a factoring service here.
Crowdfunding on sites such as Kickstarter and Indiegogo can give a boost to financing a small business. These sites allow businesses to pool small investments from a number of investors instead of having to look for a single investment.
Make sure to read the fine print of different crowdfunding sites before making your choice, as some sites have payment-processing fees, or require businesses to raise their full stated goal in order to keep any of the money raised.
Check out some emerging trends in crowdfunding here.
Businesses focused on science or research may be able to get grants from the government. The SBA offers grants through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Recipients of these grants are required to meet federal research-and-development goals, and have a high potential for commercialization.
Learn more about applying for a small business grant here.
Additional reporting by Katherine Arline and Nicole Taylor. Some source interviews were conducted for a previous version of this article.
Category: Bank loan