Entrepreneurs run into a chicken-and-egg situation when trying to get small business funding.
It’s hard to qualify for loans when your balance sheets have minus signs in the income fields. Until you can demonstrate profitability, you face challenges whenever you need additional liquidity.
Fortunately, there are ways to obtain small business funding to help you take the plunge into entrepreneurship. Here are five avenues to explore.
Line Of Credit
Before you go about ruining your credit score by financing your startup using credit cards, look into an unsecured line of credit — also known as a revolving loan.
The criteria that commercial banks use to make decisions about whether to award a line of credit has some things in common with what credit card issuers use to make determinations: A founder’s own credit score is used for insights into a brand-new business’s creditworthiness — the individual’s ability to repay debt is considered a sign of how the company might pay down debts.
Additional factors determining approval and the size of the line of credit include the length of time that the business has been in operation, revenue and any profits so far.
The amount of paperwork required has more in common with small business loans than credit cards, which might explain why some entrepreneurs shy away from applying. Another factor that seems to intimidate would-be applicants: the interest rates are as steep as those associated with credit cards.
Businesses often take out a line of credit just as a backup source of emergency funds, and either never draw any funds or just pay down balances quickly to minimize expenses.
While grants for entrepreneurs abound, the programs can be really competitive to qualify for due to the fact that you don’t have to repay them.
Do an online search to see if there are grants that you may qualify for, then read the details of the ones you are interested in very carefully — overlooking details at this stage can set you up for accidentally disqualifying yourself.
If you can prepare financial documentation of your business needs, you can set yourself apart from the competition that might provide less detail (let their oversight be where you shine by comparison).
Crowdfunding allows the masses to contribute financially to your small business. Using a crowdfunding website, you can post your business plan and request funding up to the limits allowed by the platform.
Depending on which site you choose to work with, you probably have to forfeit a percentage of the money you raise to the crowdfunding site. Often these amounts run lower than the interest rate you would otherwise have to pay on a small business loan.
Some of the sites also encourage you to provide perks or gifts to the donors, but you don’t have to reinvent the wheel for this: simply can use this is an opportunity to sell your products or services to early adopters, perhaps at a discount compared to what you might charge when your business is mature.
Partner with a Supplier
If you don’t mind getting another party involved in your business, consider forming a strategic partnership with a supplier or vendor essential to your operation.
The ideal partner would enjoy a mutually beneficial relationship with your business rather than seek complete control in exchange for providing capital.
While partnerships become almost a standard business practice, you should still be able to negotiate terms that are specific to your needs and those of your prospective partner.
Fellow entrepreneurs, what have you done to get funding for your small business?
Jackie Cohen is an award winning financial journalist turned turned financial advisor obsessed with climate change risk, data and business. Jackie holds a B.A. Degree from Macalester College and an M.A. in English from Claremont Graduate University.