Alternative Funding Options for New Business Owners
Bank loans aren’t the only option for startup companies. Many new businesses utilize these options for the funds needed to run a business:
- SBA Microloans
- Invoice Factoring
- Self-Funding, Family and/or Friends
- Merchant Cash Advances (MCA’s)
- Credit Cards
It is far from easy for a startup company owner to secure a bank loan. Given that 90% of startup ventures end in failure, funding a startup is among the riskiest investments that a financial institution can undertake.
That established, there are few commercial banks that are willing to take such a risk. So what alternative funding options are available for new business owners? Where can startups find funding?
The good news for startup company owners is that, although commercial banks may not offer any help, there are several alternative methods designed for funding entrepreneurs. Check out some of the most prevalent alternative funding options for new business owners and decide which course of action best suits your startup model.
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Alternative Funding Options for Startups
The U.S. Small Business Administration is a wonderful resource for American small business owners. The organization provides training, education and funding for the small companies that drive the U.S. economy, and they have a special microloan program for startup company owners.
The SBA’s 7(a) loan program offers startup company owners capital, and it is a good go-to for any entrepreneur. Qualifying for an SBA loan requires that you meet the SBA’s standards, including meeting their size standard and having reasonable equity to invest. Startup company owners that do manage to secure microloans from the Small Business Administration will almost always have to use the funding as a supplement to a larger source of capital, all the while accruing debt. Moreover, it is rather difficult to get a microloan from the SBA, to begin with—the competition for funding is fierce.
Nonetheless, SBA Microloans through the 7(a) program are a great resource for those that can manage to secure the funding. The $10,000+ will help you in your enterprise and it can be a crucial supplement to your other sources of startup funding.
The allure of crowdfunding is one that captivates the imagination of almost every entrepreneur—rather than selling stakes of your budding enterprise or taking out loans, one can simply solicit funds from donors, offering them gifts in return. And, more recently, equity crowdfunding, in which angel investors finance a startup in exchange for equity ownership, has become à la mode.
Crowdfunding may well be the best option for startup company owners that need financing. However, conducting a successful crowdfunding campaign is exceedingly difficult. While companies like Kickstarter and Indiegogo tout their success stories, half of all business ventures that try to secure funding through such means do not receive any funding at all.
So—if you have impeccable internet savvy and a solid marketing pitch, give crowdfunding a go. But do not count on it. More than likely, you won’t receive any substantial startup funds through these means.
Also known as accounts receivable factoring, invoice factoring is among the most popular forms of alternative finance. Invoice factoring is a process in which a factoring company essentially purchases another company’s outstanding invoices at a slightly discounted rate, liquidating the invoice immediately for the client company and then collecting payment from the client’s debtors as the pay period transpires. This service comes in handy for startup companies that can’t afford to wait 30-90 days for their clients to make payments. Factoring companies take a small percentage of the invoice’s value for themselves (called a “factoring fee”) and also take on the responsibility of receiving payments from your clients. While you lose a small percentage of the value of your invoice when working with a factoring company, the fast access to working capital allows you to further invest in your company or take on new clients.
Self-Funding, Family and/or Friends
The ability to self-fund or solicit loans from friends and family is a luxury that most entrepreneurs are not afforded. Nonetheless, there are a substantial number of modern startup companies that are finding some startup capital this way. As many as 24% of startups begin with personal loans from family or friends, and many entrepreneurial experts suggest turning to loved ones at the incipiency of their funding campaign. Moreover, studies suggest that over 80% of all startup company owners dip into their personal funds to kick-start their business venture. So—be prepared to put some “skin in the game” and invest your own capital in your enterprise. If you, your family and your friends are not willing to invest in the project, it is likely that nobody else will be, either.
Merchant Cash Advances (MCAs)
A merchant cash advance is an advance of a fixed dollar amount in exchange for a percentage of a business’s future daily credit/debit sales. Once your startup gets underway and generates some revenue, MCA’s could be an appropriate resource for your startup company. Repayment for MCA’s is relatively flexible, and it is not too hard to qualify (do keep in mind, though, that typically, you have to have been in business for at least six months, have a positive balance in your business checking account and a credit score of at least 500).
MCA’s are more of a solution for funding shortages that arise once your company has opened its doors—your startup money, in the most basic of senses, can’t come from merchant cash advances. However, your nascent operational costs can be funded by an MCA provider.
It is worth noting that the terms of repayment in MCA agreements are typically steeper than other methods on this list, and the percentage that the MCA company takes from credit/debit sales can be pretty high—especially if your business is in a revenue lull.
More and more businesses are opting to fund a chunk of their startup by assuming debt on a credit card. This practice, however, is expensive, and completely untenable if you have bad credit. Even if you have a good credit score, funding a startup through credit card usage is seen as a surefire path to failure from many entrepreneurial pundits. Nonetheless, people have done it, and it is worth noting as an option—albeit an unwise one.
There are various options for you an entrepreneur when it comes to funding a startup company. Explore each one and assess which is most appropriate for your business model. Often times, you will have to resort to a combination of the aforementioned methods— and that is normal. If throughout your research, you find that your company could benefit from the expedited access to working capital offered by invoice factoring, get in touch with Factor Finders; our connections in the invoice factoring industry will ensure that you get the best deal possible.