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Editor’s note: This is a guest post from Alex Simmonds
They say that the best time to start a small business is when the economy is in a bad state, so if you’re about to launch your business then count yourself lucky – the economy couldn’t get much worse! Unfortunately, most small businesses need capital when they start out and while most business owners are able to inject a significant amount of capital from their own savings into their new business, chances are those savings will not be enough. On the flip side, trying to raise capital for a business before that business has even got off the ground can prove extremely difficult at the best of times; investors like to see the business in action and go through the books to work out whether it is a viable prospect. That is why banks and lending institutions normally help out businesses when they are just getting off the ground. However, in the current economic climate the banks are proving somewhat reluctant to part with their money. So what is a new business to do when it comes to finding investment for things like premises, equipment, marketing and other costs?
The first thing to do is ask yourself what you’re looking for from that funding. Is it for the short-term start up costs alone or are you looking for funding to cover you for a longer term? How quickly will you be able to pay it back? What are you prepared to give up for it? If you are willing to give up a share in your business then you can look into equity funding and taking on an investor, which has the advantage of giving you funding without needing to pay it back. However, you would then have someone with a share in the business who might also want a say in how the business is run. If you are unwilling to go down that route, then you will only want to consider debt funding, which of course needs paying back. And again, whether you want debt based funding or equity based funding, you will still find that in the current climate, both are hard to get. That said, there is still funding out there. We’ve listed five alternative sources for you to consider:
This is a great place to start because the government is very keen to encourage small businesses at the moment. Because they want to encourage growth there is a large amount of stimulus funding still waiting to be allocated and some of it could be yours! The disadvantage of government funding is that you will need to suffer all the slings and arrows of bureaucracy to get it. Imagine a typical bank loan application on steroids and you get an idea of the red tape you’ll have to go through. So be prepared for it to take some time. On the other hand, if you get government funding you’ll be getting your hands on a low interest, inexpensive loan from a lender that is safe and reliable. To find out more simply head over to the Small Business Administration website.
Community Development Credit Unions
Community Development Credit Unions are a collection of socially conscious investors and lenders who have got together to offer financing to businesses that cannot get access to the usual selection of financial services. These investors will put money into CDFI’s (community development financial institutions) like credit unions that will in turn help low-income communities. If you live in a community that qualifies, or rather if your business will be located in a qualifying area, then they might be able to help. To find out more head over to the National Federation of Community Development Credit Unions website.
If the banks aren’t lending there are still opportunities to be found on peer-to-peer lending websites that offer decent interest rates depending on your credit score. Sites such as Prosper or Lending Club (and many others) collect individual investors together to lend people like you money. They get a better rate of return on their investment than if they went to a bank and you get a loan that is not too much more expensive than the bank would have given you. The better your credit rating, the lower the interest rate these websites will offer you.
Crowd – sourced Funding
Crowd-sourced funding websites are growing in popularity all the time. Sites such as Kickstarter, Profounder, Appback and 33Needs all allow you to post details of your business idea or plan and request micro-funding from numerous small donors. If you use these sites in conjunction with social media like Facebook and Twitter they can prove especially effective. In return for funding you can offer the donors all kinds of rewards, incentives and special offers.
Friends and Family
Lastly, it makes sense that one of the first places you should look for investment is amongst your friends and family. If anyone is likely to believe in your business idea it is your nearest and dearest. In addition they will be less strict in their lending requirements and not so interested in your credit rating. That doesn’t mean you shouldn’t take them seriously and not get everything written up clearly and legally however, as this will avoid any potential problems later. When borrowing from friends and family you should always consider how you will feel and how it will affect your relationship with your family or friends, should your business fail.
These are just some of the available options you should consider before you start racking up business costs on those credit cards. Other viable options include leasing equipment instead of buying it, striking deals on merchant advances (but only with reputable companies) or even some kind of equity release or fixed rate remortgage on you property, provided you have sufficient equity left in your home and the business only needs a small injection of cash.
Alex is a journalist and financial blogger. He loves to write about cricket and jazz but these days seems to be mostly writing about life insurance and remortgage rates.
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