A great idea for new business start up is only the first step toward success. Figuring out how to finance the business is likely to be amongst the biggest challenge. Every start up needs access to capital, whether it is for the initial rollout, acquiring inventory, funding product development or paying the first employee. Most business owners first think of bank loans as the primary source of money only to find out that banks are least likely to fund business start ups. Small Business Administration provides loans to start ups but there is an intense competition in acquiring it.
Here are some options beyond bank loans for financing your start up.
- Community Banks
Community banks are a major source of microloans and represent about 50% of all outstanding small business loans and start up loans. The main advantage to using community banks is that most conduct relationship based lending. This means that banks take the time to assess the quality of the loan application based on a number of different factors, they will go over your company’s finances to establish creditworthiness. As compared to major banks which rely on credit scores to process microloans, community banks are a way to go.
- Peer-to-peer Lending
Peer-to-peer lending is another great alternative to acquire business loans. Here borrowers are matched withprivate investors or businesses who are either business-to-consumers (B2C) or business-to-business (B2B) companies who can lend money to start ups. Basically, it is a process where a group of people come together to lend money to each other. It’s been around for many years and has been lending loans to many start ups and small businesses. The main advantage for borrowers is the speed at which they can access funds.
- Family and Friends
These are the people who should believe in your potential and the business idea and lend you money without waiting to see if your idea works or waiting until you have real customers, revenue and hard assets.Borrowing money from family and friends is the most safest and effective way to finance a start up. If you do borrow money from them, be sure the terms are in writing and have them looked over by an attorney.
- Crowd Funding
Crowd funding is the process of getting a large number of people to pay small amounts of money to invest in an idea or product with a promise that when the idea comes to fruition, they will be the first to get access to it. Here you need to use the power of Internet to find a crowd of like-minded people with a small amount each to back your efforts. This approach is now spreading beyond non-profits, pre-sales and memento rewards. However, for raising money legally you need to register your company.
- Vendor Financing
Vendor financing is used by small business owners if they need tangible products for inventory. Many manufacturers and distributors can be persuaded to postpone your payment until the goods are sold by you. This really means an extension of the normal 30-day payment terms to a period of months or longer, depending on your credit worthiness and extra fees.
- Venture Capital
Among the various financing options, business owners can turn to venture capital to finance their new business start up. In this, the money is given to start up firms that are considered to have both high-growth and high-risk potential. The added advantage here is that entrepreneurs are not required to pay back the loan amount but exchange ownership shares with the lender. Not all venture capital investments take place when the company is being founded but can provide funding throughout the various stages of company’s progression.
- Purchase Order Financing
The most common issue faced by start ups is the failure to accept a large new order since they don’t have the money to build and deliver products. PO financing organisations will provide the required finances directly to the supplier, enabling the transaction to complete and profit to flow to the start up.
Managing cash flow is only one of the numerous ways that business owners need to think creatively, beat the competition and survive.
Bio: Ethan Ruth is a business consultant and marketing advisor with over 8 years of experience serving wide range of industries be it health, banking and finance, telecommunication, transport and logistics, mining and energy and government. He works for TR Consulting, a full range of professional business consultancy services provider in Melbourne.
