Going to a bank or a credit union and applying for a loan is probably the most popular way of funding one’s startup or SMB. However, it isn’t without its drawbacks. First of all, in order to apply for a sizeable loan in the first place, you need to offer a valuable collateral, which is something that the smallest of entrepreneurs often lack. Second, a high-interest rate alone can be quite devastating for your budget, seeing as how it can potentially consume a significant portion of your profit. Finally, without a solid credit rating you can’t hope to get another credit approved, which puts you in a bad spot should you need to apply for another one. With this in mind, here are four alternative financing options for your SMB.
Selling an asset
The first thing you need to come to terms with is the fact that until your business is off the ground, your personal life will have to suffer. This means working long hours, never having enough free-time and even being constantly stressed out. Aside from this, you could try to downscale a bit in your personal life in order to get your business going. For instance, you could sell your rental property or sell your sports car and purchase something a bit more modest. Remember that a profitable business might buy you an even better vehicle in the future, while the same doesn’t go the other way around.
Sell your account receivables
Another way to avoid applying for a loan is by selling some of the account receivables you have yet to collect. If the greatest majority of your customers choose credit payments as their preferred method, you might end up having more money on paper than on your account. For a business in its infancy, this can be particularly troublesome, which is why you might want to solve this problem by selling some of these invoices. Through the notion of invoice finance, you can provide a steady cash flow for your company without having to apply for a loan or sell an asset.
Sell an equity in your company
If the cost of running a business exceeds your resources, it might be the right time to find a partner. The greatest advantage of selling an equity in your company is the fact that you are not only splitting the operational costs in half but the work and the risk, as well. The greatest problem with this method lies in the fact that teaming up with the wrong person might rob your company of most of its potential. The reason why so many people avoid this particular method is due to the fact that they hate the idea of giving up control more than anything else.
Create another stream of revenue
Finally, if your business has trouble maintaining a steady cash flow, what you may need is to create another stream of revenue. Seeing as how you will still spend most of your energy on the administrative tasks related to your business, it might be for the best if this income was as passive as possible. For instance, you might want to rent out a room in your home or a property that you own. You could also become an eBay trader or start tutoring online. This mostly depends on your skills, free time and personal preferences.
Each of the above-listed four items has its advantages and its drawbacks, although it would be absurd to say that one of them is clearly superior. Those with a bit more time on their hands might find creating another stream of revenue preferable, while those who can’t run the show on their own might find selling equity to be a better solution. As you can see, the choice of the right financing option for your SMB is highly subjective and completely situational.