For many entrepreneurs, the most difficult aspect of launching a business is getting off the ground - and getting off the ground relies heavily on financing. Unless you have the means to self-fund your business, you must be willing to get creative.
Five Creative Funding Options
When most people think about startup financing, things like bank loans, venture capitalists, angel investors, and grants come to mind. But what about when none of these funding mechanisms work? Are there other ways to finance your business pursuits? Certainly - and here are a few of the top "outside of the box" options:
1. Friends and Family
While it can be awkward and uncomfortable to talk about money with those close to you, friends and family are actually the best place to go. As a rule of thumb, only approach people whom you know could potentially sustain a loss without it negatively impacting their life.
For example, you'd never want to ask someone for $10,000 if you know that they only have that much in their saving account. However, that same amount wouldn't be such a big deal to someone with a seven-figure net worth. There's still the willingness factor - as in, they must believe in your idea and have enough trust to lend the money - but use this rule of thumb as a starting point to direct your conversations.
There are all kinds of strategies and techniques for asking friends and family members - and this article touches on some of the details - but the most important thing is that you remain honest and forthright throughout the entire process. Never promise something that you can't guarantee.
2. Secured Homeowner Loans
Do you have equity in your home? You may be able to qualify for a secured loan, which allows you to borrow fairly large sums of money over long periods of time - which is starkly different from an unsecured loan.
Secured loans allow you to borrow as little as a few thousand dollars to as much as a couple of million dollars, depending on the equity that you have in your home. Also, you don't have to repay these loans in a few weeks or months like you would with traditional business loans. Repayment terms often range from 3 to 30 years.
How are these lenders able to offer such great terms and large amounts? "By requiring your home as collateral," secured loan expert Kevin Horrod explains. "Lenders are less concerned about default when a home is used as collateral, because it gives them a tangible asset that they can sell in the event the borrower does not repay the loan."
You must understand that you're putting your home at risk. If the business doesn't work out, you can be foreclosed upon. However, if you truly believe in your idea and can sustain the risk, then secured homeowner loans are fantastic funding options.
3. Product Presales
If you already have part of your business up and running, you may be able to leverage product presales to fund business growth. The beauty of this approach is that you don't have to give away any equity or pay any interest on a loan. Everything is handled internally.
There are obviously complications and hurdles that come along with this approach. For example, you'll have to figure out logistically what it looks like to coordinate inventory delivery from the supplier and invoicing on the sales side - but it can and does work for some entrepreneurs.
4. Crowdfunding
If you spend any time on social media, you're surely aware of the crowdfunding trend that's sweeping the internet. And, while many people use crowdfunding to finance personal things like charitable causes or health crises, there's also ample opportunity for business funding.
Every day, entrepreneurs are collecting thousands of dollars to launch and to grow their businesses. It takes a lot of time and effort, but it's entirely possible. Start doing some research on successful crowdfunding campaigns, and take notes on the commonalities among them. With the right approach, you can fund your business without giving away any equity or having to deal with constricting repayment terms.
5. IRA Financing
Did you know that there are ways to tap into your IRA or 401(k) and use it to finance a business? You'll need to roll your money over into a corporate retirement account that allows you to invest in the business, but it's not as challenging as some would assume.
If you're planning on going this route, it's imperative that you meet with a financial advisor. Doing it wrong can leave you with heavy tax burdens and a small nest egg. But do know that it's an option.
Simple Tips to Increase Your Chances of Getting Funded
Have you tried multiple options, but just can't seem to break through? Well, consider the fact that it may not be the types of financing that you're pursuing, but that what you're offering isn't seen as valuable enough to warrant being funded. Consider the following suggestions:
- Have a strong business plan. The business plan that you share with potential financers is crucial. Pay close attention to the executive summary, which is often the only thing that lenders will read if it's not persuasive enough.
With a strong business plan, the right partners, an in-depth understanding of your target market, and an engaging sales pitch, you should be able to dramatically increase your chances of obtaining some type of startup financing.
Move Past Traditional Options
Don't limit yourself to traditional financing options like bank loans and venture capitalists. While these are certainly popular forms of funding, other opportunities exist. However, you must be willing to get creative. Consider the seven alternative methods referenced in this article, and don't be afraid of going back to the drawing board to increase your chances of getting funded. There's typically a way; you just have to uncover it.