Originally Posted by John Dessauer on October 6, 2016
It can be tough for entrepreneurs to find enough startup money to transform their business ideas into a reality. Mainstream lending institutions such as the neighborhood bank may view your business prospect as too risky and refuse to make the loan. So how does an entrepreneur finance their ideas when traditional lenders refuse financial assistance? Listed below are more creative funding sources, one of which may be an exact fit for your business financing needs.
- Individual Investors
An individual investor can be anyone from your Aunt Sally and Uncle Bob to a successful business person looking for a good investment opportunity. Entrepreneurs should be aware that along with financial assistance some individual investors may wish to have some control in the business. For example, an investor that makes a loan to a restaurant entrepreneur may want to make decisions concerning some of the foods or ingredients offered on the menu.
Individual investors can be found on national websites, but it is usually a better idea to find local investors that have a personal interest in the development of the community. Contacting successful entrepreneurs in your area is another option to find a suitable individual investor.
These are loans that rarely exceed $50,000 and target small business startup capital. The average microloan must be repaid in 6 years. Some microlenders are funded by the U.S. Small Business Administration and offer not only financial assistance to entrepreneurs but professional help in maximising the loan funds during startup. Some microlenders also provide technical advice to enable an entrepreneur to produce superior products or services and thereby increasing the opportunity for success. Besides providing working capital, the microloan is used to purchase inventory, fixtures, and any needed equipment needed by the business.
- 401K Loans
Sometimes called IRA Financing, these are loans made against cash in a personal 401K account. Hence the entrepreneur borrows their own money. These loans are usually paid off within a five year period and are low interest as well. Probably the best thing about these types of loans is all of the interest paid goes straight back to the borrower’s account instead of a lending institution. With these loans, some restrictions apply, such as the percentage of money borrowed from the account.
- Personal Credit Cards
In my personal experience, I have known several entrepreneurs that have started their business with no more funding than credit cards and gone on to great success. However, due to the high-interest rates credit cards usually carry, these entrepreneurs either paid off these accounts as quickly as possible or obtained better financing once their business began to flourish.
- Home Equity Loans
Home equity can be used to finance a new business venture. Some entrepreneurs take out a home equity loan where the amount owed on the house plus a portion of the equity is refinanced and creates a new loan.
When using this method, the monthly amount of the loan is lower and can be repaid over a much longer period.
- Vendor Financing
This type of financing involves a vendor extending the terms of the purchase of materials until the entrepreneur sells the manufactured product. Some vendors are willing to do this because not only does increase their company sales; they also earn interest. This option is advisable to new businesses that already have customers lined up to buy their product.
“Remember, wealth has nothing to do with money, success has everything to do with failure, and life is as simple as you make it!” – John Dessauer