It’s not a walk in the park to get business funding. The most dire funding needs linger in the early business stages only.
In reality only a few newly-established businesses can attract outside investment.
That’s why we will discuss some effective non bank financing options you may consider.
Specifically, most banks require a five-year profile of a risk-free and profitable startup business. If you have such a portfolio, you may get a loan quickly.
This traditional labor-intensive lending process has become a challenge now. Local shops and small organizations can’t access capital from them anymore.
The excellent news is startup founders can opt for several alternative financing options. They don’t have to bug traditional financial institutions only. Here are three of those several financing methods that aren’t bank loans.
Determine Your Funding Needs
The first step here is determining your funding needs. The US Small Business Administration says that self-funding is always better. But you can’t apply the ‘one size fits all’ approach here.
Every business has separate business needs. Hence, dynamic funding needs.
If you have adequate funds, go for self-funding. That’s also the best non-bank option you may consider.
The other two options are:
- Private investors and
- Private loan agencies
Self-Funding Your Business:
Let’s discuss two kinds of self-funding options.
Bootstrapping
We also know this as bootstrapping. Self-funding, known by any name, is the best and safest funding option for your small business.
Often, you can reach out to friends and family members for funds, too. That’s self-funding as well.
You may access funds from your 401(k) account too.
Self-funding lets you take complete control of your business. However, you remain liable for the risks in the industry, too.
I recommend using the funds sparingly. Don’t overspend because they are your funds.
One standard self-funding error is impulsive investment. This happens mainly because you are not liable to anybody else for your business decisions.
You will only run out of funds quickly if you spend recklessly.
In a small business, contingent costs are a big problem. If you have scanty funds, paying off contingencies will trouble you.
When your back hits the wall, you won’t have any leverage.
The bottom line is to use self-funds wisely.
Personal Loans From Loan Agencies
Personal loans are not bank loans for business. You may perceive personal loans as bootstrapping.
This line of credit can be used for large purchases, moving costs, debt consolidation, emergency expenses, and even business ventures. Startup founders can easily apply and get approved for a personal loan, unlike when they opt for business loans.
Since it’s a personal loan, startup founders are liable for repaying the debt.
In other words, the lenders assess the business owners’ creditworthiness based on their credit score and financial situation, not their business’s history, finances, and future forecasts. Considering these, they need a good credit score and regular income to be eligible for personal loans.
Although there are personal loans for bad credit, they usually come with higher interest rates. These bad credit loan options may also have more restrictions, so startup founders may not be permitted to utilize these funds to finance their businesses.
It’s best to confirm this situation with the lender before applying.
Depending on startup founders’ creditworthiness, personal loans offer more or less $1,000 to $20,000 borrowing amounts payable for one to seven years at a 3% to 30% interest rate. While it may sound great, startup founders should be very careful.
Using personal loans to fund startups may mean amalgamating personal and business assets, which may cause issues with bookkeeping, tax, and legality.
Approaching Private Investors
The two familiar private funding sources are angel investors and venture capitalists. Let’s discuss these two prospects for your business here.
Venture Capitalist
A venture capitalist firm is a private equity investor that offers capital to fast-growing startups with long-term growth potential, such as technology-driven businesses.
They specifically target firms that are ready to commercialize their idea to reduce their risk of losing investments.
The median deal size of later-stage VC-backed startups is around 14 million USD, which was higher than the 9.9 million USD in the previous year. It can be as low as $100,000 for the seed funding and as high as $25 million for more mature businesses.
Venture capital is a viable option for established startups that wish to expand but have no physical collaterals or access to equity markets.
Besides securing future rounds of funding, venture capitalists also offer additional resources, such as publicity and exposure, networking and collaboration opportunities, and assistance with hiring and building a team.
The thing is VCs offer capital to startups in exchange for an equity stake. In simpler terms, they own a part of the company and its future profits in return for the funds they offer.
Most of the time, VCs’ stake in startups may be more than 50%. Entrepreneurs may also end up losing management control and ownership stake in their business.
Angel Investors
If venture capitalists belong to companies or firms, angel investors are people who independently invest their own money in newly established and small companies. These angels are usually wealthy individuals or retired company executives.
Unlike venture capitalists that only invest in already established businesses with growth potential, angel investors fund startups from the onset, typically when it’s ready for venture capital.
As a result, they’re willing to offer capital to startups interested in becoming profitable, even if they haven’t proven themselves yet.
Angel investors offer many of the same non-monetary benefits as venture capital firms but have smaller investment amounts.
Venture capital firms tend to invest in millions, while angel investments are in thousands, usually between $25,000 to $100,000, and can be as high as $750,000 if they join a group.
Like venture capitalists, angels receive a portion of the startups’ profits, around 10%-50%. While angels don’t take a seat on the board of directors in startups, they still take a proactive approach to running the business.
Hence, early-stage business owners may lose complete control as part-owners.
Final Thoughts
Non-bank sources can be good sources of investment capital. However, startup founders should be wary of the risks that accompany them.
Their need for quick funding makes them susceptible to predatory business practices, scams, etc.
If you’re a startup founder, don’t use funds without doing the legal work properly. Always seek professional help.
Above all, try bootstrapping or self-funding first. If that fails, go for micro business loans like SBA loans. But if you want to stick to nonbank loans, contact angel investors. However, seek enough info on a private investor before putting in your faith.
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