Home » Business Advice » Alternative Business Funding Options for Your Small-Business Startup

Alternative Business Funding Options for Your Small-Business Startup

Are you looking to start a business now or soon? While you may have a revolutionary idea, chances are you’ll face difficulties getting it off the ground due to insufficient funds or lack of funds altogether.

You aren’t the only one in need of funds; even established businesses require funding from time to time. According to the National Small Business Association, only31% of small businesses in 2017 said they didn’t use financing. For those that needed financing, 73% reported ease in acquiring required funds but 25% of them reported difficulties in accessing financing

.In this article, you’ll learn about various financing methods available for your business.

1.    Small Business Administration Loans

Known as SBA in short, this agency works by partnering with interested lenders. This means the SBA doesn’t offer loans directly. Instead, they insure the loans issued to borrowers. This reduces the risk on the lender’s side because if the borrower fails to repay the loan, the SBA will repay through the insurance.

Businesses can get microloans for bigger amounts from SBAup to millions of dollars. However, startups and small businesses don’t require huge amounts of money to begin. A 2012 study conducted by the SBA, showed than only 3% of startups with a single person required $50,000 or above to launch.

There’s a microloan program available for small businesses that business owners can take advantage of. Often, this program issues a maximum of $50,000 that a business can use to increase its inventory or use for operating expenses.

Pros

  • You can get funds from a partner SBA lender, even if banks decline your application. This is due to the guarantee offered by SBA on all loans issued.
  • You can get favorable terms similar to non-SBA loans.

Cons

  • You have to pass stringent requirements to qualify. For instance, if you have a startup, you should prove your experience in the industry. Also, for new businesses, you must have business assets or cash—$1 for each $3 you seek.
  • Smaller loans attract higher interest rates. For instance, a loan of over $50,000 maturing in under seven years, lenders will charge 2.25% on top of the prime rates. For loans under $25,000, you’ll have to bear an additional 2%.
  • You may incur prepayment penalties on some loans.

2.    Small Business Loans

This type of loan is tailored for businesses only and are available from various credit unions, banks, and online lenders.

Pros

  • If you qualify for a business loan, you may get a huge amount compared to personal loans. This can help you cover the costs of big purchases.

Cons

  • If your business doesn’t have established credit, doesn’t own assets, and hasn’t been in operation for a specific period, chances are you may not obtain a loan.
  • Some lenders will require you to provide a structured and detailed business plan to help them understand your business, especially how you intend on getting revenue.
  • With collateral in place, it’s easy to secure a loan. However, keep in mind that failure to repay the loan will lead to seizure of the assets.

3.    Business Credit Cards

It doesn’t matter whether you’re a startup or an established business, a business or personal credit card should be in your financial toolkit. Credit cards allow you to make huge purchases such as equipment or even use the money to cover operating expenses.

Obtaining a business credit card can help you build credit for your business. In addition, credit cards come loaded with rewards and cashback programs. However, this will only happen if you pay all bills on time and in full.

If you stick to the credit card when making purchases for the business, you’ll end up with a lot of savings. Keep in mind, when applying for your first business credit card, you may need to put your personal credit on the line. Therefore, the card issuer may turn down your application due to poor credit history.

Pros

  • You may qualify for a card with favorable terms such as zero APR on all purchases, but only for a limited period, and only if you have good credit.
  • Credit cards are flexible and with good credit, chances of obtaining one are high.

Cons

  • You may qualify for a card with a low credit limit. insufficient to meet your funding needs. Also, you have to remember to pay the balances in full and on time to avoid interest.
  • Credit cards come with higher interest rates compared to business and personal loans.

4.    Personal Loans

You can use personal loans searched via just right loans for almost anything, and that is the biggest advantage of this type of funding. If you have a startup or a new business, a personal loan can come in handy if you need a financial boost. Online lenders, credit unions, traditional banks, and community banks are some of the financial institutions you can apply to for a personal loan.

Pros

  • All you need to qualify for a personal loan is a good credit score and history and a stable income. There’s no need to furnish the lender with business details.
  • Personal loans offer lower interest rates compared to business loans if you have good credit.
  • You can borrow a small amount—as low as $5,000.
  • Fixed-rate personal loans come with a fixed repayment period and a fixed interest rate. This means you’ll know your exact monthly payments and the time you have to clear the debt.
  • Variable-rate loans, on the other hand, are where the interest can fall or rise at any point in time. However, you’ll still have a fixed repayment period, which will allow you to plan ahead.

Cons

  • Since your business isn’t involved in the loan, this means you’re personally liable for the repayment. Regardless of whether the business fails or succeeds, you’ll still have to repay the loan.
  • If you have poor credit, you’ll bear a high-interest rate.
  • Personal loans don’t offer huge amounts. This means the funds you’ll receive may be insufficient for the business.
  • Again, since the business isn’t involved in the loan, it means the business will not benefit from any credit gain as a result of on-time payments.

5.    Equipment Financing

This type of financing allows you to purchase machinery, vehicles, or equipment needed in the business. You can obtain these funds through online providers, banks, and equipment dealers. This is a great way of getting your business on track since you get the equipment needed and can also use the money on other areas.

APRs will differ from one lender to another. Also, the type of equipment you need may affect the APR. Banks, for instance, offer lower rates compared to equipment dealers, but then there are other fees you may need to pay.

Often, equipment funding will depend on the mode of ownership, but there are three types of financing you can choose from:

  • Equipment loans: Here, you own the equipment and you’ll have a certain timeframe, typically one to five years to repay the loan.
  • Fair Market Value Lease: Mention equipment leasing and this is what will jump into your mind. To use the equipment, you’ll need to make monthly payments, like rent. After the lease expires, you have the option of buying the equipment at its fair market value, return it, or extend the lease.
  • $1 Buyout lease: Under this lease, you’ll pay rent on the equipment each month. After the lease expires, you can buy it for $1. You can use this route if you’re certain you’ll buy the equipment after the lease expires. Typically, you’ll get 2 to 5 years to use the equipment and interest rates starting at 6% to 16%.

Final Thoughts

Starting a business is difficult, especially if you don’t have the necessary funds. However, with the numerous options listed in this article, you should be on your way to success. It’s also important to add that these aren’t the only funding options available for your startup.

There are others, such as family and friends, crowdfunding, angel investors, venture capitalists, etc. The best way is to identify a funding method that is compatible with your business to avoid bumps along the way.