I am often asked about options to finance a start-up business. Of course investors and bank loans are a common solution. However, a budding entrepreneur simply might not want to bring on investors or can’t secure a bank loan. For those business builders who need to follow another path, there are many other solutions.
The following 10 options are attractive alternatives to investors and bank loans and as with any financial decision, there are multiple benefits and risks that must be thoughtfully explored.
Business credit cards
A number of companies provide credit cards designed for business use. These types of cards offer low introductory rates that make the initial months of usage particularly attractive. However, the interest rates are often in the double digits. So when that free or introductory period is up, this can be an expensive option for financing your business. Only those entrepreneurs with the discipline to manage this form of cash should consider it.
Home equity line of credit (HELOC)
If you own a home and have equity in it, then some mortgage companies will consider loaning you money based on the amount of equity you have in the property. A home equity loan can often make it an affordable form of financing. Of course, there will be monthly payment requirements. While the interest rates and write-offs are a positive element, never forget the risk of losing the family home is a real one.
Sadly, many Americans don’t have money saved for a business or any other use. If you aren’t one of these statistics, you should consider using these funds. Available cash has no repayment, interest or debt schedule associated with it. However, taking money from savings to fund a business is risky as savings accounts are often cushions for failure, not fuel for investments.
This available cash can be obtained without interest or a payback schedule. Unlike savings, there are often penalties and taxes associated with accessing these funds. Consult your financial planner before using stock and retirement funds. Outside of the potential fees and taxes you’ll have to pay, consider these options much like savings in that once they are spent, they are gone for good.
Do you have cars, boats or other larger assets that are valuable? These are assets that can be sold for cash. Think of non-revenue producing assets as a source of money that can be turned into fuel to fund a fast-growing company.
There are a number of grant programs that support entrepreneurs and businesses. Start by searching government websites for grant programs. While the money is “free,” the level of detail and the requirements to apply can be very laborious. This is a great funding option if you have the time, talent and willingness to go through the grant process.
Consider entering any number of business competitions that award cash prizes. Almost all have money that is given with no expectation of payback. Many hours of time and preparation are required to put together a winning entry. If you decide to enter a competition, pick the ones that have the best cash rewards and match your type of business. Remember this is a short-term financial option, not a good long-term strategy.
Revenue based financing (RBF)
Revenue based financing provides capital to a business by “selling” an ongoing percentage of a company’s future revenues. Investors give capital to a company in exchange for a small percentage of gross revenues. RBF is a hybrid of bank debt and venture capital. Revenue-based loans are most appropriate for companies already generating revenues but without hard assets typically required to get bank loans. It’s especially applicable for companies that have seasonal or hard to predict revenues.
Friends and family
Friends and family know you better than any bank or investor. They have confidence in you. They want to help you. Asking kindred for support is problematic, however. It’s a two edged sword — if you succeed and pay them back, life is wonderful, but if the business fails, you’ll be hurting the ones closest to you. Neighbors and friends should be told they may lose their investment and should therefore only provide the cash they can part with.
Here’s a novel concept — how about asking your customers to fund your business? If you spend the time and effort to work with potential customers to build a product or service they want, they may be also willing to pay you in advance. Customers who are willing to do so can provide you with the needed funds to support short-term, organic growth. While most businesses won’t be able to achieve speedy expansion this way, it can be a clever way to fund a start-up business.
I invite you to carefully weigh your own funding options, and wish you the best of success in your business endeavors. As always, you can contact me at @AskAlanEHall or via my personal website, www.AlanEHall.com.
The original version of the article appeared in Forbes: http://www.forbes.com/sites/alanhall/2013/04/19/when-investors-arent-an-option-10-alternatives-to-finance-your-business/
Alan E. Hall is a co-founding managing director of Mercato Partners, a regionally focused growth capital investment firm. He founded Grow Utah Ventures, is the founder of MarketStar Corp. and is chairman of the Utah Technology Council.