Venture capitalists may have had some big successes with companies like Apple, Google, and Facebook, but these are just rare wins that prop the myth of VC financing. The truth is less than 1% of U.S. companies have raised capital from VCs, the industry is contracting (source), and the average fund either breaks even or loses money (source).
If you require funding for your business but want to avoid the loss of control over your company that often comes with venture capital (VC) financing, here are five alternatives to consider.
Small business funding options
“There are many avenues for funding a business without giving up equity,” says Kathryn Petralia, co-founder and chief operating officer of online business loan lender Kabbage.
“Venture capital is generally best for companies that expect to grow rapidly and eventually provide investors an exit opportunity in the form of an acquisition or an IPO,” says Petralia. She adds, “Most small businesses don’t fall into this category. Owners are better off trying one of the many small business financing products available.”
A wide variety of alternatives for funding your business exist. Each option has its benefits and drawbacks. Which one you choose will depend on your financial situation, the amount of money you require, and how quickly you need funding.
Venture capital is generally best for companies that expect to grow rapidly and eventually provide investors an exit opportunity in the form of an acquisition or an IPO”
1. Use personal credit
Drawing money from personal credit cards, a home equity line of credit, or your retirement account are all viable options for funding your business venture. If you have a high credit score of 700+ and a good track record of making payments on time, you’ll probably be able to access cash in a timely manner for your business. The catch is “you’re betting your nest egg on your business, which can be scary if things don’t go well with your venture,” says Petralia. In the case of a home equity line of credit, your home is your collateral, so you risk losing your house if you can’t repay the loan.
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2. Ask your bank
“If your business is big enough and established, and you’re seeking a large enough loan (greater than $200,000, or even more for some banks), your local bank may offer their own product or an SBA (Small Business Administration) government-backed loan program,” suggests Petralia.
Bank loans often require a personal guarantee/form of collateral, such as your home. These loans can also be very time-consuming, and approval rates are low, notes Petralia. “Many bank loans also require a large deposit at the bank to obtain the loan, which seems counterproductive, because if you had the money, you wouldn’t need a loan,” she says.
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3. Consult an online business loan lender
Many online small business lenders exist today. “There are a variety of business loan products available, including installment loans, lines of credit, merchant cash advances, invoice financing and factoring,” says Petralia. Most online lenders feature streamlined application processes, and approval rates tend to be higher than traditional bank loans. “In some cases, rates can also be quite low,” says Petralia.
“These loans can be expensive (some in the many hundreds of percentage points, if calculated as an APR), so do your research,” says Petralia. “When deciding which company from which to obtain financing, it’s important to understand the total cost of borrowing. Don’t just focus on the term or the fee percentage. Some lenders participate in a program called Smart Box, which can help you understand the total cost of borrowing,” she says.
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4. Talk to vendors and buyers
You may be able to obtain payment terms with your vendors, which will enable you to extend your cash flow. On the flipside, you may also be able to get prepayments from customers that make large, routine purchases.
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5. Friends and family
“Perhaps you have a rich aunt or distant cousin who’d like to help fund your business,” says Petralia. “It’s worth asking for financing assistance from those you know.” This method is usually fairly easy and low to no-cost. You simply present the friend or family member with the amount you need and why. If things go badly, you’ll disappoint family and friends and risk not being able to pay the person back and harming family relations.
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Tips for successfully acquiring business financing
In addition to having good personal and business credit, it helps to be organized if you want to acquire business financing, says Petralia. She says, “Make sure you have ready access to important, up-to-date accounts and documents used to run your business, including checking, accounting and payment processing.”
Owners are better off trying one of the many small business financing products available.”
It’s also important to keep your personal and business accounts separate. “Commingling your personal and business checking account will be a red flag to a potential lender,” says Petralia.
In addition, show confidence about your business. “When you’re really excited about your company and you can demonstrate a winning business model, chances are your lender will be inspired and ready to finance your venture.”
Rustling up money to help ensure your small business does well is no easy task, but it’s not impossible. Increase your odds of financing your endeavor by visiting SuperMoney’s Best Business Loan Companies and its loan offer engine, which allows you to get prequalified loan offers with firm rates and terms without hurting your credit.