If you’re a business owner, or about to be one, there are a lot of things you need to consider – staffing, inventory, customer satisfaction, benefits packages, etc. – but no matter how you look at it, chances are, the overarching issue, and likely the solution, often comes with a price tag.
But what happens if you don’t have the money to solve the problem, to rebrand, to hire more employees, or to simply order inventory? Frequently, business owners turn to loans and credit cards to foot the bill, but loans and credit cards, by nature, come with their own unique set of caveats, including good credit.
So, what do you do if you can’t, or don’t want to, secure the necessary funds through the aforementioned pathways? There are other options available; all you need is a little ingenuity, analysis and planning.
1. Business Grants
If time is on your side, business grants are one of the first places you should look if you’re in need of a financial boost. Though we often think of “free money” as the unicorn of the financial world, business grants are just that – money you don’t’ have to pay back.
Small business grants come in a variety of shapes and sizes, and they’re offered by various entities, including government organizations, non-profit agencies, and private companies, like Nav. To identify and apply for grants, you will need to buckle down and do some research. However, if you can find and qualify for one, the time spent looking and applying for business grants will be well worth it.
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2. Friends & Family
For some, this route isn’t ideal, but for others, a private loan from friends or family can be just the right opportunity to get things moving down the right track. Borrowing from friends and family eliminates credit score requirements, and repayment terms can be much more flexible.
That said, this type of financing does take on its own unique set of risks, particularly destroying meaningful relationships or endangering the financial standings of loved ones. For that reason, most financial experts would recommend this type of agreement be entered into as a last resort.
If you do find that friends and family are your best option for financial backing, then be professional about it by creating a loan document, incorporating interest, and paying it back as quickly as possible.
3. Home Equity Loan or Line of Credit
Home equity loans and home equity lines of credit are often easier and quicker to obtain than their business-focused brethren. They also typically come with lower interest rates and flexible terms (i.e., use isn’t restricted, unlike many business loans).
Which one should you consider? That depends on your needs. If you need to invest a sizable, one-time amount into some aspect of your business, like new equipment, then a home equity loan may be best. Conversely, if what you really need is access to a regular reserve fund (think paying clients or contractors), then a line of credit may be a better option.
While it’s possible to use your home equity to finance your business, it may not be your best option. Home equity loans and lines of credit to bolster your business finances can be risky, though. If you can’t pay back the loan or line of credit, you risk losing your home, not just your business.
Though it’s certainly not for every business, nor is it a guaranteed source of funding, over time, this method of securing money has proven to be a solid option for those that put the work in. Crowdfunding, as the definition may suggest, relies on monetary backing by a group of investors, or members of the “crowd,” and in recent years, companies like Kickstarter, have really brought notoriety to this idea.
Kickstarter, however, only represents a small piece of the crowdfunding pie, and while reward-based funding, like Kickstarter may be great for new products with customer appeal, it’s not always suited for other business models, like service-based businesses.
There are, however, other types of crowdfunding that may meet your needs:
- Equity-based: This may be perfect for startups that don’t have any other financing options and don’t mind sharing future wealth. Equity based-crowdfunding relies on connects between small businesses and interested investors who will contribute equity in exchange for a stake in your company.
- Lending-based: Similar to traditional loans, but without the bank supplied red tape, this type of crowdfunding also connects small businesses with investors, but there is no equity exchange. Instead, recipients are required to pay back the loan, with interest.
- Donation-based: Though geared towards social initiatives that lead to positive changes in communities, if your business will make your community a better place to live, then you may be able to engage in donation-based crowdfunding.
Keep in mind that crowdfunding relies a solid attraction of investors, be they consumers, like reward-based options, or financial investors, like equity and lending-based options, so make sure you have a solid business plan and marketing plan that will entice.
5. Invoice Financing & Factoring
If you have a lot of outstanding invoices, and you need cash fairly quickly, you may want to consider invoice financing or factoring. Which one do you want to use? That depends on your relationship with your clients or customers.
- Invoice Financing allows business owners to use their unpaid invoices as collateral in exchange for the desired cash advance. In this situation, you still own your invoices and you remain the main point of payment, and engagement, with clients. Typically, this type of financing only works if you’re offering customers an extended payment window (i.e., 30 to 90 days).
- Invoice Factoring is a sales transaction in which you sell your invoices to the lender, and the lender collects any outstanding debts. That means you won’t be interacting with clients, and if long-term relationships are part of your business plan, you may want to save this for customers who you no longer wish to do business with.
Differences aside, both will require you to part with a portion of your original invoice cost, depending on the lenders terms, so the quick cash does come at a cost.
Traditional lending options aren’t always going to be the best option for your business, and that’s okay. There are plenty of other opportunities out there, and a thorough review of your options may just lead you to the money you need to build your business the way you want.
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