- Forget the banks! 5 alternative ways to fund a business - July 14, 2015
Alternative ways to fund a business
As an aspiring entrepreneur, you may well find funding a small business trickier than you had imagined. Just being smart and enterprising won’t be enough to meet the eligibility criteria some lenders demand.
A lender can appear so cautious you may wonder whether anyone could satisfy their requirements, whilst others may define their ideal borrower so narrowly that most applicants fall outside that box anyway.
However, the good news is there are a lot of business-funding alternatives. Here are five for you to consider:
1. Portfolio Loans
This method is an alternative to selling your assets to raise business funding. Here, your portfolio of assets is used to secure revolving credit up to an agreed maximum value. This is described as the loan-to-ratio value, and is typically set at between 65 and 90 per cent of the value of your assets.
Such arrangements have the advantage of being quick to set up – often in just a matter of weeks – and interest rates are quite reasonable. Loan terms can also be quite generous, and one important advantage is that any increase in the value of the portfolio will still ultimately accrue to the borrower.
However, it would be wise to keep the loan amount well below the maximum available to avoid difficulties should the portfolio happen to decline in value.
2. ROBS (Rollover as Business Start-up)
This has become a common way to fund a start-up by using retirement assets.
The scheme, sometimes also described as a 401(k) rollover, permits an entrepreneur to contribute up to 100 per cent of retirement asset holdings to an investment in a start-up enterprise or franchise.
The ROBS scheme deposits the designated retirement amount in a special account set aside for that purpose. As a result, this new financial entity effectively becomes a stakeholder in the fledgling business, whilst also neatly avoiding tax liabilities, and without incurring the usual sanctions applied to the use of retirement funds for alternative financial purposes.
Even so, the scheme is complicated to set up and thus should only be entrusted to a professional company with appropriate experience.
3. Unsecured Credit
This method is only for business-folk with a squeaky clean bill of health! An unsecured loan may realise funding amounts of up to $125,000 which a lender will advance without requiring you to lodge a private property or business assets as a ‘security’ against repayment.
Applicants will require an excellent personal credit record in order to access this type of funding.
In addition, lenders will need to see a cast-iron business plan accompanied by a coherent forecast of business earnings over the first three years. Unsecured loan schemes will attract a range of fees and interest rates, so it will be important to carefully evaluate a selection of offers to secure best value.
The ever growing phenomenon of crowdfunding links individuals who wish to sponsor a business with potential entrepreneurs seeking funding. Sponsors will gain some kind of reward-based equity from the success of the business.
As an entrepreneurial candidate, you’ll have to present your business plan on a prominent crowdfunding location such as Crowdcube or Kickstarter.
If successful, the dynamics of crowdfunding mean that donations or investments would then come together in various random amounts: for example, $10,000 dollars could result from 2 investors offering $5,000, a total of 1,000 investors contributing $10 each, or anything else in between.
The response from crowdfunders also offers the applicant some useful feedback on the viability of a proposition. If funding is not readily forthcoming, this may flag up a need to review the business idea itself.
5. Peer-to-Peer Loans
Unlike crowdfunding, with Peer-to-Peer lending, finance seekers need not give away any equity, but just pay interest on loans.
This tends to result in a highly personalised end relationship often exhibiting more trust, shared values, mutual interest, and shared expectations between the parties than might otherwise occur through ‘normal’ funding routes.
Peer-to-peer lending sites such as Zopa and Lending Circle have often been described as ‘financial dating agencies’, which is a helpful analogy to the extent that it underlines the importance of protecting everyone’s interests by getting the business relationship right from the start.
The most important advice for those needing funds for business start-up is to choose a financing method that suits their specific needs and, most importantly, that will be wholly viable in the long term.