3 Alternative Financing Options For a Small Business
Raising funds is almost always necessary when starting a new business, but it can be tricky. If you have a credit score below a given number, or lack a substantial business history, many financial institutions may deem you ineligible for a commercial loan. While this can be frustrating, it does not mean that your dreams are over. Fortunately, there are a number of alternative lending options that are worth considering in such a situation.
There are many types of asset-based loans, but all essentially function by lending against the value of a given “asset” — real estate, equipment, inventory, or something else. If you are having trouble securing a typical bank loan, consider whether you might borrow against an asset you own — property, for instance. Asset-based loans are often quick to access, and relatively flexible in spending restrictions.
However, it is important to be cautious with any asset-based loan, because a default may lead to you losing something significant of value, which can be personally and financially devastating.
Crowdfunding is an increasingly popular means of funding new businesses. Under one method, a new business will attempt to solicit a large number of small donations from a wide pool of donors, in order to raise sufficient capital to cover a down payment, or other opening costs. This can be effective, community-oriented, and rewarding, but typically takes a wide social support network to be successful.
Another method of crowdfunding involves seeking larger donations from wealthy investors or investment groups. This typically involves a smaller number of donations, but may require giving up ownership equity in exchange for investment. Naturally, this only works if you’re comfortable giving up some level of control over your business.
A private loan is another common method of alternative lending. It is a general term, but often refers to a direct loan from a wealthy individual or group.
Because a private loan is negotiated on an interpersonal basis, a strong personal relationship can sometimes lead to a good deal, with favorable terms and good interest rates. On the flipside, because you negotiate privately, your lender might insist on high rates in exchange for taking on risk.
These are only three alternative lending scenarios that may work when raising money for a business. If you are unable to secure a conventional loan, or want to broaden your options, it is worth looking into these and other alternative financing options.