Alternative Approaches to Financing Your Business
So your business loan just got rejected by the bank. These days may be rough, but funding an enterprise has never been easy. Even giant companies took their lumps when starting out! To provide you more options and help you in your efforts, here are several alternative approaches to financing your business.
Approach #1: Your credit card
If you’re looking for an alternative to borrowing from banks, then consider using your credit card. They’re an easy source of funds, but come with a price: the interest rates are perhaps the highest you’ll find among unsecured debt. But since you’ll be financing your business, get ready to spend. To manage your growing debt, you might have to pay your balance in full every month, or at least put in considerably more than the minimum payment.
Approach #2: Your savings
You can always use your savings to finance your business. In fact, many small businesses start this way. It involves a bit of risk since you’re putting your reserves on the line, but not having any other investors gives you free rein over your business. Moreover, you establish your start-up with zero outside debt so when it earns, you can afford to pay yourself and/or reinvest in your business.
Approach #3: Crowdfunding
Crowdfunding is white-hot, thanks to sites like Kickstarter, Rock The Post and Gambitious. Simply put, crowdfunding is about asking a group of people (in this case, online) to finance your project. Many kinds of activities have been funded by such sites like scientific research, video games and political campaigns. But before you rush to Kickstarter to fund your business, be ready to set how much money you need, justify why you need it, and provide incentives for pledges.
Approach #4: Peer-to-peer lending
Peer-to-peer (P2P) lending is the practice of loaning money to strangers or "peers" who are part of a P2P lending network. The lending network then pools the money to fund someone’s business on the other side of the world. Since P2P lending doesn’t fall neatly into the regular types of financial institutions, they are considered alternative financial services.
Approach #5: Borrow from friends/family
Asking family and friends for funding may be easier than approaching a financial institution, but it has its own set of complications. If your business fails—and it could—your relationships could be affected as well. But if you and your loved ones can handle it, make sure you put everything on writing and be professional about it.
Approach #6: Home equity line of credit
A HELOC is like a second mortgage on your house, where your collateral is the house itself. The loan lets you draw cash against your equity in the home. The problem here is that if your business fails, you lose your house as well. If you can handle the risk or if you’re sure your business would take off, then go for it.
Approach #7: Factoring
Ever heard of the term "factoring" in the context of finance? It’s an approach to funding where a company sells its accounts receivable at a discount for cash. The purchase price is usually at 70 per cent to 85 per cent of the accounts. If your business needs cash badly, you can resort to factoring but your assets (i.e. receivables) lose value in the process.