With no history, no track record, and no revenue, borrowing capital for a startup can sometimes feel like searching for the Holy Grail. Nevertheless, there are options, but they might not be where you expect—here are three of the most popular:
Friends and Family
Borrowing from friends or family continues to be a very successful source of capital for small businesses. Although it might not be the first place business owners’ look, it’s one of the places where business owners (both startups and established businesses) enjoy a lot of success. Pepperdine University’s Graziadio School of Business publishes their Private Capital Access Index every quarter and friends and family have quarter over quarter been a very successful source of capital for business owners—outpacing crowdfunding, grants, trade credit, business credit cards, bank loans, online business loans, factoring, merchant cash advance, and equity financing for all but the largest small businesses (those over $5 million).
This option is particularly attractive to many small business owners who have access to friends or family members with the resources available for investing. Depending upon the relationship, it can be easier for an early-stage entrepreneur to obtain a loan from a family member or friend compared to a more traditional business loan. If you can demonstrate a viable business and a plan to generate revenue, this type of capital can sometimes come with very low or even no interest.
Crowdfunding has become a very popular way to obtain capital to start a new business idea in recent years. If you can motivate individual members of the crowd through an online crowdfunding portal to contribute to your idea, you can capitalize a new business or a new business idea. What’s more, it’s the idea that motivates the crowd, not how many years you’ve been in business or your credit profile.
There are two types of crowdfunding you should be aware of, gift- or donation-based crowdfunding and investment crowdfunding. In exchange for a contribution, the former requires a business owner to offer some type of premium or gift, while the later requires the business owner to offer a small percentage of ownership equity. The SEC currently requires the investor be an accredited investor, though recently finalized rules will open the door further to retail investor participation.
Click HERE to read about five types of businesses that could be a good fit for crowdfunding.
Non-Profit Micro Lenders
Non-profit micro-lenders focus on small businesses that have the potential to provide an economic impact in the community or businesses that can leverage these small loan amounts into a big impact within their businesses. These micro-loans often include very favorable loan terms along with very low or even no interest, along with advice and mentoring to help business owners build successful businesses.
The SBA offers a micro-loan program with loan amounts up to $50,000 through non-profit community-based organizations with experience in lending as well as offering management and financial advice to borrowers. According to the SBA, the average loan size in the SBA program is about $13,000.
In addition to non-profit lenders directly associated with the SBA, there are others, like Kiva Zip, Accion, and the Tilt Forward initiative that offer interesting programs—typically at relatively low cost to the borrower.
These are three very accessible options available to small business owners seeking capital. Finding the right option for your business will depend upon your loan purpose and how much capital you are looking for.