Running a small business is such an exciting endeavor. Massive sales, major profits, job security and fulfillment are all on the horizon for the hopeful entrepreneur. Unfortunately, the pin that often pops that bubble is a little thing we all call money.
Luckily with some creative bootstraps, a thoughtful entrepreneur can explore a variety of capital opportunities. Below are the pros and cons of five funding options, and frustrated small business owners can rejoice – because not one of them includes the elusive bank loan.
Individual investors can provide either your startup or running business the capital it needs. In exchange for relinquishing a portion of your ownership, capital from investors can range from a few hundred thousand dollars to even millions.
Seek out investors with experience in related (or even competitive) fields. Universities, venture capital clubs and confederacies are all great places to start looking.
Be Advised: For startups, acquiring investors can be costly; sometimes they can demand a stake as much as 50%. Be sure to negotiate terms that work well for you too, including some possible buy-out options for the future.
Crowdfunding is buzz-word in the business world largely in part to the JOBS act which would legislatively approve smaller groups of people the right to invest without so many strict terms.
Because crowdfunding collects money from varied individuals, success lies in getting people to believe in your cause enough to support it. Non-profits and those that engage in social entrepreneurship seem to hold the most promise in achieving crowdfunding success.
Be Advised: Because crowdfunding could portion out smaller, yet multiple investments in your business, you run the risk of being seen as unattractive to big time investors further down the road.
Friends and Family
The benefits of borrowing from friends and family are pretty obvious; chances are you will not have to deal with massive interest rates, collateral or other strict stipulations. However, that does not mean you should handle the matter unprofessionally.
Whether your business loan is coming from your mom or best friend the stipulations should be formally documented, and carefully thought out. Be passionate when detailing your plans and show them statistics for your measured and projected growth.
Be Advised: Relationships can easily get ruined when money gets mixed in. Think long and hard about the repercussions should your business fail and you cannot afford to pay your loved one back. If you do consider taking out a family or friend loan, be sure to take the least amount possible, regardless of their generous offering.
Merchant Cash Advance
Polarizing the bank loan, merchant cash advance providers supply expensive funds in exchange for speed, ease and convenience. By purchasing a future portion of credit card sales (at a discounted rate) these lenders can get funds to business owners, in some cases, as fast as seven business days.
While merchant cash providers are arguably the most inclusive of lenders, their advances work best in situations where you are putting the investment back into your company (buying inventory, hiring staff, advertising campaigns, etc.). With simplicity in mind, merchants agree on a small percentage to be automatically taken out of their daily batches, basing repayment on the flow of their individual business.
Be Advised: While they do not require collateral or perfect credit scores, merchant cash advance providers heavily base their rates on the sales history of your company. This puts a lot of startups out of the running (though some reputable merchant cash advance providers offer startup loans as well). Also, be advised of brokers who kill your credit score by shopping it all over town. Your best bet is to find a direct lender and check up on their reputation with solid sources like the Better Business Bureau first.
Small business owners would be wise to open their eyes to the funding paths less-taken. Bartering goods and services may have been the way businesses were run in the past, but that does not mean they cannot work just as effectively today.
Seek out other small business owners that are related or complementary to your industry. To be successful in bartering you have got to make your products or services appealing and useful to neighboring companies. Like many business relationships, the key is to craft a creative win-win.
Be Advised: Not everyone will be able to make bartering work as it rarely provides a way to satisfy rent or employee payroll. Still, with diminished risk, individual startups in their earliest stages should consider giving it a shot. Keep in mind that the government is happy to let your business barter, because they tax your “barter credits” the same way they do monetary profits.
Kelly Gregorio writes about topics that affect small businesses and entrepreneurs while working at Advantage Capital Funds, a provider of merchant cash advances. You can read more at the Advantage Capital website.