Starting a new business venture demands a lot. Beyond the tremendous time and energy it consumes, there are capital requirements that are quite often difficult to meet. Banks and traditional business lenders aren't generally interested in startups. They want to see established revenue streams before you can qualify for a loan. This is where alternative lending can help. When you need money to get up and running, a startup lending program can give you the boost you need.
Requirements for Traditional Loans
To receive a loan, a lender needs to be convinced you'll be able to pay it back. Requirements vary depending on the type of loan or the financial institution doing the lending. At a minimum, though, most will look to your level of capitalization and the cash flow you can demonstrate with your current financial records.
All of this makes sense. Still, that gives little comfort to the entrepreneur who has a great idea and a solid plan, but hasn't begun to generate a steady revenue stream. You need money to make money, but you have to be making money to borrow! It can be enough to frustrate any business owner, and it creates a powerful roadblock to success.
Types of Startup Funding
Fortunately, several alternative types of lending can help you fill that void and get your business started. One option that's quickly gained popularity is reward-based crowdfunding. Basically, you convince customers who are pre-ordering from your business to provide up-front funding in exchange for a future delivery of goods and services. It can be an extremely valuable tool for those who can demonstrate they'll be able to fill those orders. Because this type of funding does not involve a credit application, it's also attractive for people who do not have strong credit going in.
Another option to consider is microlending. Many alternative lenders and even some nonprofit organizations provide smaller loans specifically targeted to help startups get off the ground. The amounts might be capped at $5,000, $10,000, or other levels that can be enough to get you over an initial hump, but do not by themselves meet all of your funding needs. Microlenders will generally require you to use your personal credit to qualify. So, if you need to build your credit up, it's smarter to focus on that first before seeking microlending options.
Secured Funding Options
For many startups, a good solution is to look for a secured loan. Equipment loans or sale-leaseback arrangements, for example, either provide money to purchase equipment for your business or give money secured by existing equipment you bring to the table. Traditional business loans use your revenue or existing funds as collateral; an equipment loan uses those machines or property for the same purpose. It opens up funding opportunities to help you get going.
If you have a supply chain in place but need cash to meet your payment obligations, supplier credit can help. This is something you would negotiate with your suppliers to delay payments by 30 to 45 days. It can be a great option for you if you have customers lined up but have a financial crunch that prevents you from filling orders. In that situation, you can use those orders as collateral to help you secure the credit with suppliers.
Similarly, invoice financing uses outstanding client invoices to secure your loan. In this situation, you have customers with orders in place, and what those customers owe becomes your lender's collateral. This type of funding helps if you've advanced to the point of having pre-orders for products, but need a boost to fill them or meet other operating expenses.
Finally, if necessary, you can use your personal assets, including your house, to help secure a business loan. Be careful here; if you've set up your business as a corporation to shield yourself from personal liability, mixing your funds can allow lenders to try and "pierce the corporate veil" and argue that you're personally responsible for your business debts. Still, if you need a boost to get started, you can structure a personal guarantee in a way that still protects you later.
Always Look at Loan Terms
For any of these lending options, you need to carefully examine the loan terms offered to you. Some lenders hedge startup loans by either lending less or charging much higher interest. You should always look at different lenders and products to make sure you are getting terms you can live with.
At Kenmore Capital, we work with your individual circumstances and needs to help you get the best financing for your unique situtation. If you need a startup loan for your business, contact us today. We'll analyze your needs and options and find the best funding opportunity to help you launch from solid ground and reach the heights of business success