So you want to expand your business to a better location, or hire additional personnel, or start a new line of product. But do you have capital to make your dream a reality? There are many ways businesses can source for start-up capital, and borrowing is one of them.
A lender is willing to help achieve your business goals. All you need to do is maintain a good relationship with them by repaying the loan on time. The earlier you repay, the earlier you part ways with a lender. And the better for your business.
Borrowing comes at a price, though. You’ll pay off a loan with additional costs including annual interest rates. But these costs are often too low. Think approximately 3.75% of the loan. Then again, interest agreed on or set is deductible. That makes borrowing an ideal option. This post brings to light eight unusual ways you can seek funding for your business.
- Family and close acquaintances
Before technology became the in-thing, before the advent of smartphones, people would rummage through phone numbers on their notebooks and choose whom to approach for financial assistance, or rather, who would afford to loan them money.
Today, all you need to do is scroll through your phone list and do the same thing. Borrowing from family and close acquaintances has its perks:
- No credit checks – Family and friends won’t bother to ask for your credit score.
- Loan terms are favorable – Amount to repay is the same amount you borrowed.
- Zero interest rates – The principal amount borrowed does not accrue over time.
- Flexible repayment terms – You agree on a repayment date that suits you.
However, there’s a downside to borrowing business capital from family and friends. It’s easy to sever family (and friendship) ties and bonds. Relationships are easily broken, too. And trust issues creep in eventually when you don’t repay the money on time.
- Home equity loans
Borrowing against your home is a surefire way to raise business capital. Your home’s equity accrues over time depending on its value, and the housing market. The good thing about using your home as collateral is, you can access almost 80% of the money you need as a loan.
The higher the equity, the greater the amount you can take out as a loan. Compared to commercial loans, home equity loans are flexible and have low interest rates. This makes them attractive. Also, the funding option comes with zero repayment penalties and interest is payable in years. The drawback? It’s easy to lose your home when you fail to repay the loan.
If you’ve set aside retirement savings, you can use them to fund your business or raise startup capital. Borrowing from your 401(k) plan has its upside.
First of all, it takes a short period to process the loan. The loan can be arranged in a matter of days, and voila. Also, interest is low and you can easily repay the loan in a span of 5 years giving you more flexibility. The best part? If you pay off the loan early there’ll be no penalties for you.
But taking money from your retirement savings to fund your business comes with a catch: your money won’t grow. The growth of your saved funds stagnates. Also, you’re only eligible to get a loan from the 50% of the benefits your savings could have earned. Nothing more. So you can’t borrow more than $50,000. This figure can be limiting.
Note: IRS (Internal Revenue Service) considers 2% interest rate on loans taken against retirement savings or 401(k) plan.
- Credit unions
Your business can benefit by getting a loan from a credit union. But you have to be a member of a credit union to become eligible for a business loan. The good thing about credit unions is, their loan fees and interest rates are often low.
Not to mention, the loan application process is quicker compared to if you had processed the loan from a commercial lender. The fact that credit unions are a non-profit organization, the lending process is a lot faster. The downside? The application process of the loan is done manually.
You are to personally bring your business plan to showcase your future business projections, hard copies of your financial statements, and tax returns dating as far back as three years. In other words, it is a formal process.
- Small Business Administration (SBA) loans
Unless you need a disaster loan, SBAs do not offer loans directly to businesses. However, they lend loans to small businesses via commercial lenders.
There are a handful of small business administration loans you can take advantage of, but this will depend on the nature of your business and what you need the loan for. Good thing about getting a loan from an SBA loan program is, short repayment terms and low-down payment.
Compared to bank loans, your business stands to benefit more if it’s sought funding from a small business administration program. But there are cons to seeking this funding option. You can’t borrow a certain amount of money. There’s a limit to how much you can borrow. In addition, SBA loans come with costly expenses and fees spread over a period of months.
- Online Lenders
If you’re a small business owner seeking a loan to expand your business, you may want to consider online loans here or similar website. This is a funding option that has mushroomed over time with business owners getting quick loans. Often, these loans are short term loans.
Online loans are a valid funding option in spite of many lenders painted in bad light thanks to their shady operations. What are the benefits of seeking an online loan?
- They’re accessible 24 hours a day, 7 days a week
- Loan approvals take a short time
- Little to no paperwork is needed
Perhaps the disadvantage of seeking a loan from an online lender is, interest rates are exorbitant. A borrower is subjected to high annual percentage rates of up to 200%.
Often referred to as crowdfunding, this borrowing option can benefit a business owner to raise capital or money for their business. Crowd funding is done through an online portal where you borrow little amounts of money from other people on the said portal.
To put it another way, you will be relying on other people to help raise business capital. If you’re a startup venture, this is a good funding option. Interest rates are fixed but this depends on the agreement you may have with a lender, or what your desire to pay back as the borrower.
This option, however, can be frustrating. There’s no guarantee that people will lend you money for your business. In fact, funding chances are often slim when you go the crowdfunding way.
Want quick cash? How about borrowing against a family antique, memento or heirloom. It can guarantee you immediate cash. It is a viable funding option for your business. The more valuable the item is, the higher the amount you’ll receive as a loan from a pawnbroker.
The beauty about going to a local pawn shop to pawn an item for money is, you won’t be subjected to a credit check. But there’s a bad side to seeking loans from a pawnshop – high monthly interest rates.
That interest rates are set on a monthly basis makes this option unattractive for business owners who, for one reason or another, might delay repaying the loan. The rates can go up when you fail to repay on a monthly basis. This can lead to a cycle of bad debt.
Weight out the options you have on the table before you go borrowing money for your small business. Sometimes getting into debt can sink you further into more debt. Eventually, you are trapped in a vicious debt cycle.
But if you have no alternative than to borrow money for capital consider your family and close acquaintances or friends, or better, take a loan against your home. The latter option is riskier as you stand to lose your home if you don’t repay the loan on time. You can also borrow money from your retirement savings, credit unions, SBA loan programs, and online lenders, too.
Any of these options, alongside crowd funding and seeking a loan from pawnshops, can help steer the growth of your business. You only need to choose a funding option that suits your business objectives. Remember to talk to an adviser before taking any of these options.