Finance

Are you finding it hard to get a small business loan? Here are 4 nontraditional ways to raise capital for a business

March 12, 2018

This article originally appeared on Inc.com as part of BusinessBlocks CEO Justin Kulla’s weekly Inc. Magazine column. See the original post here.

When you first launched your small business, you might have financed the venture from your own pocket. But as your business grows, your needs will change. At one point or another, every small business can benefit from having more capital — either to expand the business, finance new technology, stock up on inventory or hire new talent.

A lot of people ask — where do I get my money to grow my business? The first place to start is thinking about — what do I want the business to become and what strategy do I pursue? Once you understand the economics of your business, you can then pick the financing model.

Daniel Powers Jr., who founded Real Brave, a music school that helps students discover their inner rock star, has steadily grown his business to over $1 million in revenue. He used a variety of financing methods to fund his company’s growth.

At the beginning, he bootstrapped, taking little salary and investing money back into hiring and technology. He wanted to grow more quickly and decided to open new locations with the help of his own cash and investors. Even still he wants to grow faster, so he’s considering a variety of debt and equity options.

If you’ve tried bootstrapping or if your loan application was rejected by the bank, here are four additional ways to get the money your business needs.

Consider alternative lending.

A growing number of new online lenders have emerged, opening up new pools of capital for small businesses. Online business loans are particularly attractive because they offer quicker and easier access to capital with more lenient approval requirements.

Fundera, an online marketplace for alternative lending, is a great place to start researching which lender would best suit your business needs. The downside is that interest rates can be significantly higher than that of a traditional bank, going between 15 to nearly 70 percent.

You should also consider evaluating the annual percentage rate (APR), loan term, repayment schedule and any potential penalties. For example, if a 12-month loan and a 10-year loan have the same interest rate and fees, they will have very different APRs because of the term period — long versus short.

You’re paying a substantially lower APR over the 10-year period compared to the 12-month term.  Make sure to check the fine print.

Franchise your business.

Franchising allows you to expand without the risk of debt or the cost of equity — it involves using other people’s capital to grow fast. For the motivated franchisee, you provide a blueprint on how to establish a location, run effectively under your brand and then, you receive a percentage. You must be comfortable with having other people be stewards of your brand and if they can’t figure out how to properly work the model, it can be damaging.

Raise angel money.

Angel investors are usually friends and family of the small business owner. They are individuals you know, trust and, while hoping not to, are capable of losing the $50,000 or $100,000 you’re asking for. The biggest risk here is damaging your relationships with them, making things awkward and strained during the next big, Thanksgiving dinner.

Break into venture capital.

Venture capital is supposed to be like rocket fuel, so you grow fast. Some of the largest companies raised venture capital, like Google and Facebook. It’s important to note that most businesses aren’t built to grow exponentially, so venture capital is not likely to be the best source of capital. For those that are interested and able to raise venture financing, the pressure to grow really fast can put pressure on a business.

The venture capitalists will have expectations of high growth and input on governance. If things don’t go well, they can easily walk out of the deal whereas you put everything in this basket. You may also lose majority control. So remember, venture money does not mean free money.

© 2018 BusinessBlocks. All rights reserved.

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