Can’t Get a Loan? 5 Financing Alternatives for Small Business
Whether it’s personal or professional, rejection hurts! But when it puts your small business at risk, it can be downright devastating. You don’t know if you’ll be able to keep your business going. Maybe you’re even wondering if you’re going to lose your home. Don’t give up! There is plenty of financing alternatives for a small business.
Financing Alternatives for Small Business Owners
Sourcing financing alternatives for your small business needs is possible, but you do have to know what’s available. Here are just a few options to get you started.
1. Angel Investors
If your business is in its early stages but has good cash flow and strong potential for growth, you may be able to get funding from an angel investor.
Most angel investments are valued at around $600,000 – no small amount to entrust to a newer business. Typically, angel investors are willing to contribute this much for two reasons:
- They have the capital and they want to support small businesses.
- They see the potential for significant returns.
In exchange for a monetary contribution, the angel investor receives equity in the company. The amount can be anywhere from 10 percent to 50 percent.
If you choose these types of financing alternatives for your small business, be careful. The larger the share your investor gets, the more control he or she has over your business. You might even find yourself overridden on major decisions, like whether or not to sell.
2. Venture Capital
Venture capital is a lot like angel investing, except that you’re working with an organization rather than an individual. Venture capital funds also tend to be more specific than angel investors in the industry, company stage, and geographical market that they work within.
Start by finding a firm that aligns with your goals. Your next step will be to create a pitch that will project confidence, professionalism, and good profit potential. If you generate enough interest, the firm will create a term sheet outlining what needs to happen before you get your funding.
Like angel investors, venture capital firms will want some sort of return. They usually get that return through one of three arrangements:
- Convertible preferred stock, which the investor can exchange for common shares
- Convertible promissory notes, which becomes equity in the company when certain conditions are fulfilled
- A Simple Agreement for Future Equity, or SAFE. These convert into company stock when the next round of financing happens.
Always make sure that you understand the details of your agreement with the venture capital firm when it comes to these types of financing alternatives for your small business. Of particular importance is the number of board seats that the firm will receive, since more seats translates to more control over the company.
Designed to let you source capital from a broad donor base, crowdfunding works on the principle that small amounts add up. It became famous thanks to sites like Kickstarter and GoFundMe, but now there are dozens of crowdfunding organizations that target different types of projects, from inventions to new business models.
Crowdfunding is financing alternatives that are becoming increasingly popular with small business owners for a number of reasons. If you go with this funding method:
- You get publicity in the process of securing funding.
- You don’t have to repay the money that you receive.
- You choose the incentives that you offer to your funders.
There are two basic incentive models in crowdfunding, rewards-based and equity-based.
Rewards-based crowdfunding provides donors with a special gift related to the business, such as a gift card or preview access, while equity-based crowdfunding compensates donors with shares in the company. This latter option can lead to ongoing investor relationships but can come with more strings attached.
4. Invoice Financing
If you have an established B2B company with a customer base, invoice financing provides a funding option that doesn’t require giveaways or shares of your company.
These small business financing alternatives financiare simple. You sell unpaid customer invoices to an invoice factoring company, which gives you an agreed-upon percentage of its value – usually between 50 percent and 90 percent of the invoice’s value. When the customer pays the invoice, you receive the remaining amount minus fees.
- Straightforward application process
- Approval depends on your customers’ credit, not yours
- Financing in as little as 24 hours
- Costs may increase the longer the invoice is outstanding
- Possible additional fees if a client cancels service
- High fees – approximately 3 percent plus a weekly percentage of outstanding amounts
Another major downside to invoice financing is that it isn’t available for B2C companies. If that’s your business model, you may be better off depending on individual supporters.
5. Friends and Family
According to Small Business Trends magazine, more than 80 percent of startup funds come from the entrepreneur’s own savings or personal network. It can be great financing alternatives for your small business, but it comes with its risk.
When you get money from friends and family, it’s easy to depend on informal agreements that can backfire if expectations are unclear. To avoid this happening, have both parties sign a formalized document that specifies:
- How much money you will receive
- What the other party will receive in return
- If repayment is involved, when that will happen and whether there are contingencies
Remember that even with a formal agreement, personal relationships can dissolve over financial disputes. Tread very lightly.
Have Home Equity? Sell & Stay and Avoid the Risk
If you’re a homeowner looking for financing alternatives for your small business, you may already have the funds you need in your home equity. Maybe you’ve already tried to access this equity by applying for a loan and were turned down. That’s okay – you have another option that doesn’t involve entering into a borrowing relationship.
It’s called a sale-leaseback. As financing alternatives for small businesses go, this one is very low-risk. It’s not a loan and it doesn’t require you to give up shares of your company. You don’t even have to submit income or credit information!
How It Works
A sale-leaseback allows you to sell your home and convert your equity without moving. All you have to do is sign an agreement, which gives you the right to stay in place as a tenant. You keep paying rent until you’re ready to buy your home back or move.
Staying in place means that you can focus on alternatives for financing your small business. And with the equity from your home as liquid capital, you’ll have the funds to do it!
Financing Alternatives for Small Business: Key Takeaways
If you’re looking for financing alternatives for your small business, but are unable to qualify, there are other options available to you. Speak with a financial advisor on which would work best for your needs.