You have a great idea for a product or service, and the passion to be your own boss. That’s a great combination for a successful start-up, but there is one essential missing ingredient: start-up capital. If you’re lucky, you can obtain grant money, but grant money is hard to come by. Many aspiring entrepreneurs put their own skin in the game, bootstrapping their enterprises with credit cards. Other would-be business owners are able to obtain the cash they need from family and friends. But if those resources aren’t available to you, or you need to raise more money than those resources allow, there is still hop. Read on to see which are are the top sources for a start-up business loan.
Small Business Administration
The Small Business Administration (SBA) represents a tremendous resource for start-up capital. The SBA administers a variety of loan programs, including the popular 7(a) Loan Program for general start-up capital, the 504 Program for equipment purchases and its micro-loan program. The SBA website also provides a wealth of useful information for aspiring entrepreneurs, even if you don’t wind up borrowing through the SBA.
If you are a veteran, you are entitled to a broad range of services and resources, including loans and other forms of start-up capital for your small business or entrepreneurial venture. The VA Office of Small and Disadvantaged Business Utilization website serves as a portal to a variety of resources exclusively targeting veterans. You can obtain information about federal, state and local information through the portal.
Many large banks have severely tightened their credit requirements, especially where small business and entrepreneurial lending are concerned. But many community banks emphasize lending to local constituents, including would-be business owners. If you have a well-executed business plan that will create local jobs, you may find that community banks are more receptive than their national counterparts.
Credit unions frequently have more tolerant lending policies than banks, because they are run as nonprofit ventures. You have to be a member of a credit union to qualify for a loan, but there are so many credit unions in existence these days that you are almost certainly qualified to join at least one. As with community banks, you may also receive a favorable reception from a credit union if your proposal boosts job opportunities for local residents.
Free-standing finance companies have been a traditional resource for individuals who could not obtain bank loans. Interest rates for finance companies are typically higher than those for banks and credit unions. However, lending standards are often more lenient as well. Do not confuse finance companies with payday lenders, many of which prey on aspiring entrepreneurs just as they do with desperate individuals seeking personal loans. If you’re considering borrowing from a finance company that you’re unfamiliar with, check out the company with the Better Business Bureau or the Secretary of State or District Attorney’s offices in your states to be sure the company is legit.
Peer-to-peer loans are the 21st century version of lending circles, with one important difference. Lending circles involve extended families, tribal groups, and other community-based relationships. By contrast, Peer-to-peer lending involves borrowing money collected from strangers. One important implication of this lending model is that prospective borrowers must disclose extensive personal information essentially to complete strangers. This information is compiled through online profiles, which may be subject to malicious attacks. Many peer-to-peer lending programs also have minimum credit score requirements that borrowers must meet in order to be eligible.
Home Equity Loan
Home equity lending used to be considered the go-to source of funding for everything from big weddings to kitchen overhauls. The housing crisis and tighter lending standards have put a damper on home equity loans, but they have not disappeared. If you cannot obtain funding any other way, a home equity loan can mean the difference between opening your doors for business and remaining a would-be entrepreneur with a dream.
Credit Card Factoring
Credit card factoring involves obtaining financing based on projected future credit card transactions. As a business owner, you would receive a portion of your credit card payments immediately in exchange for allowing the credit card factoring company to take over your actual credit card revenues. Credit card factoring is usually only an option for more mature businesses. This is because business owners must demonstrate they have actual credit card revenues. If you have managed to pre-sell your product or service in advance of production as part of your start-up venture, you may be eligible for credit card factoring.
Venture capitalists are individuals or firms who provide capital to companies who don’t have access to equities markets. If your start-up has the potential to generate large revenues, you might peak the interest of a venture capitalist. If so, he or she will invest in your venture in exchange for equity or ownership of your company.
Angel investors are similar to venture capitalists. Like venture capitalists, angel investors also seek promising ventures in which to invest their money. But angel investors tend to specialize in higher-risk and early-stage businesses. Venture capital investors will, typically, focus on more established companies with some kind of track record and a strong growth potential.
Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.