It’s a Catch-22 situation – finding a startup business loan in the current economic climate is extremely difficult; on the other hand, the best time to start a new business is during a recession, because infrastructure and staffing the business is much cheaper! Given that getting startup financing is going to be quite tough in the present situation, here are some alternative avenues for getting that business loan to get your startup off the ground.
Look to your ‘inner circle’.
By inner circle, I mean your family and friends! Here’s how to make this work:
- Approach your family, friends, coworkers and others who know you well to lend you the money at nominal interest rates.
- The suggested interest rate should ideally be below the market lending rate, but a little higher than the current interest rates being offered on deposit accounts.
- Agree on an initial moratorium period for repayment of the loans, i.e. no payments for the first six months to a year or even more, while you build up the business. Another alternative is to make periodic balloon payments at predetermined times, mutually agreed upon when setting up the arrangement.
This way, you get your business loan and your lenders get a higher return on investment than if they had just left the money idle in the bank. A word to the wise here, be prompt in fulfilling your commitments with regards to repayment of the loans, else you will be endangering the business and personal quotient with your lenders!
Look at non-traditional funding resources
Instead of the traditional route of approaching banks or financial institutions which have many restrictive norms which a startup business cannot comply with, look at any of these unusual funding resources:
- Online lenders such as Projectsfinance.com, On Deck Capital, etc provide quick and easy financing options for small businesses and startups.
- Person-to-person financing or social web lending is a new concept in lending for small businesses. These online portals offer loans of up to $25,000, with lower processing costs and interest rates, by matching up borrowers with potential individual investors. Some of the companies offering such services are:
(a) Virgin Money – Offers a scheme similar to borrowing from the “inner circle” as mentioned above, but the entire process is managed by Virgin.
(b) Prosper – is a peer-lending portal where both investors and borrowers sign up. A list of borrowers is put up and investors who are looking for a good return on their investments place bids for funding these loans. Once the successful lender reviews the borrower’s credit history and loan requirements, he/she can make an offer to provide the loan at a fixed rate of interest. If the borrower agrees to the terms, money is immediately transferred to the account and repayments are automatically debited from the borrower’s designated bank account.
(c) Zopa.com – another provider on the same lines as Prosper.
(d) Lendingclub.com – As above.
Finally, look to yourself!
Instead of simply putting your money into the business, make it a loan! This funding option works well for small amounts (up to 20k) and you can repay the money back once your business is up and away.
Of course, you can still try your luck with traditional sources of funding such as banks and credit unions, but the resources mentioned in this article provide a useful backup in case the former method fails.
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