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BusinessFinanceStartup


ALTERNATIVES TO BANK LOAN FINANCING THAT STARTUPS CAN’T IGNORE

By sarikazdubey

November 24, 2017

5 Mins read
373
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Among the many challenges that startups face, the problems of securing adequate
and inexpensive financing are right at the top. 2008, because of the financial
turmoil that ensued all across the globe, was a year that marked a massive
change in the startup financing and small business financing ecosystem. That’s
because banks started being very conservative about issuing loans to startups
and small businesses.

Today, things are better, but startups still face a lot of challenges,
particularly because traditional lending institutions are not keen on investing
in startups operating in an unproven market. Plus, startups could always face
unforeseen needs for financing because of events like a payment default by a
large buyer, a new market opportunity, a price war with a competitor, etc. To
tackle all these challenges, startups need to know and make use of alternative
options to bank loans. This guide covers some of these options.


ANGEL INVESTORS

Seasoned entrepreneurs, who’ve seen the fruits of their toil, and with the will
and money to stay in the entrepreneurial landscape, can be nothing short of
angels for your businesses. That’s why they’re called angel investors. These
investors, if they like your idea, and believe in your startup’s potential, are
able to provide the necessary funds in return for equity holding in your
business.

Apart from the investment, angel investors bring their business expertise to the
table. Because they now have vested interests in your business’ success, they
will be willing to offer you their business connections and the necessary
mentorship to help you succeed. Plus, these investors have been in
entrepreneurial shoes for most of their lives, and hence will be patient with
your business. Pitching to angel investors requires you to be very realistic and
hands-on with everything you do and the numbers you project.


PEER TO PEER LENDING

Just like banks invite deposits from the public in return for small interest
rates and issue loans to those who need it on larger interest charges, peer to
peer lending platforms connects borrowers with lenders. On a typical peer to
peer network, you just need to sign up to the platform, specify your financing
requirements, and leverage the opportunity of having the target met by
individual contributors. By cutting out lending institutions from the system,
peer to peer lending platforms deliver the following benefits to startups and
businessmen:

 * They can get loans of up to $25,000 (typically) at more attractive terms as
   compared to banks.
 * The loan approval lifecycle is much shorter on these platforms as compared to
   traditional bank loans, which helps startups meet sudden cash flow deficit
   problems.
 * As your credit ratings on a peer to peer lending platform improve, you get
   more attractive deals on loans. 
 * We recommend you check out lendingclub.com and prosper.com – two of the most
   credible peer to peer lending platforms. 


FRIENDS, FAMILY, BUSINESS-SCHOOL COLLEAGUES

For many entrepreneurs, it’s the last option to ask friends and family members
for financial backing, even when their startup is in dire need of the money.
Agreed, borrowing from friends and family comes with the risk of straining your
relationships. But that’s only when the terms of the personal loan remain
ambiguous, and the expectations among the involved parties remain unstated. Here
are some best practices to help you manage such situations:

 * Keep the option of loans from family members open as a last resort for
   financing
 * Clearly mention the amount you need, the purpose you wish to fulfill, the
   duration and terms of paying back the loan, and the interest you are willing
   to give. 
 * Steer clear of friends without stable income sources; they’re likely to float
   the idea of premature payments of the loan when the going gets tough for
   them. 
 * Leverage the services of platforms like VirginMoney.com; it eases the process
   of borrowing money from people you know and is acquainted with. 
 * Done rightly, the art of getting short term and small loans from personal
   contacts can put your startup in a great position, because of the time and
   hassle it saves you. 


CASH IN YOUR RETIREMENT FUNDS

Though this might sound way too risky for many entrepreneurs and businessmen,
there are situations when using your retirement nest becomes a smart option. To
put things in perspective, note that government’s ERISA law exempts you from
early distribution charges and penalties as long as the investment of the money
is done in your business. You can also consider combining your retirement
account savings with other loans, earnings on shares (don’t forget to check live
share prices) to finance your startup’s cash needs with greater flexibility.
Also, entrepreneurs consider their startups as a mode of diversification of
their retirement holdings portfolio. Particularly for these entrepreneurs,
there’s a lot of useful advice to be had at GuidantFinancial.com.


BANK OVERDRAFTS

Startups are bound to face fluctuating income patterns in the initial stages. A
bank overdraft can be a great asset for such businesses, particularly when they
know what seasonal highs and promotion-driven sales surges will enable them to
pay off the overdraft amount. That’s the core idea that overdraft accounts work
on – get help during leaner times, and repay it when the surge appears. Most
banks are open to offering flexible overdraft account terms to new businesses,
so look for a good deal.


CROWD FUNDING

Chances are you’ve already read about success stories of startups that have made
it big, riding on successful crowdfunding campaigns. Crowdfunding completely
inverts the traditional funding model. Whereas bank loans are about one
institution putting in all the money you need, crowdfunding is about bringing
together hundreds and thousands of believers, each of them contributing a
reasonably small amount of money, to meet your financing goal. Because each
contributor only has a small stake, the conditions of the ‘loan’ become highly
favorable. Plus, in most crowdfunding models, you only need to reward the
contributors and don’t need to pay the money back. Some of the reward options
are:

 * First versions of the finished product shipped to the contributors
 * Merchandise of the brand
 * Preferential pricing or discount coupons


FINANCING FROM COMMUNITY SCHEMES

There are many community development finance initiatives (CDFIs) that issue
small to medium sized loans to startups and entry-level businesses, apart from
helping existing businesses overcome cash crunches. For businesses whose credit
requests are turned down by banks and traditional lending institutions, CDFIs
can be just the lease of life they need to raise capital for setting up shop,
buying equipment and raw material, and even purchasing a new property. One
restriction, however, with most CDFIs is that they are focused on businesses
with a social goal and those that aim at the betterment of specific sections of
the larger community. From bridging loans to working capital finance CDFIs can
solve a lot of financing problems faced by startups.


CONCLUDING REMARKS

There you have it; we’ve covered some of the alternative financing options for
small businesses and startups. When you’re stuck with an immediate cash need,
and can’t get a bank to approve your loan, you’d do well to try out some of the
options covered in this guide. Irrespective of the alternative financing model
you choose, make sure you properly research and understand the terms.

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