What Are the Alternatives for Small Business Startup Loans?

Published on: 06 May 2019 Last Updated on: 02 December 2021

An investment can yield fruits or fail. There are so many risks involved when starting businesses and investors will always wish for the best. Small business startup loans are essential for your business to grow smoothly. However, where there is a less risky option, no one would hesitate to consider it. This is especially the case when it comes to financing startups.

Small business investors may be reluctant to review the loan options for good reasons. For example, a loan is an obligation that has to be obeyed. If the investment does not yield profits, the owner must repay using other alternatives. In many cases, these loans have very high interest rates, and the total cost of borrowing may be too expensive for small investors.

It is imperative to reduce the risks involved in borrowing funds, especially for startups. You come to think of the adverse effects a loan may have on your financial profile, and it becomes necessary to consider alternative options for financing your venture.

Let us examine the scenario portrayed earlier. If the investment fails to be successful, it means the business cannot repay the loan. If you do not have alternative ways of settling the debt, you will default.

As a result, your credit score will be negatively affected, and this reduces the chances of securing other loans in the future. Suppose you do not default but repay late, your credit history will still be damaged. Because of all these risks, it is important to consider alternatives for small business startup loans.

Alternatives for Small Business Startup Loans:

Alternative small business loans are more flexible with good credit requirements. Statistics show many small businesses are turning to alternative financing. As a business person, you will be confronted by situations that demand instant funding.

Even though bank loans are perceived as the best solution in such cases, the truth is banks are often unwilling to offer loans to startups. That is why many are checking legit online loans like Instant Loan for fast-approval financial loans.

Still, your venture might not meet the conditions required by banks, and if you are not careful, you may not salvage your business situation. You can turn to your retirement funds, dispose of a personal asset, or use your credit cards. Develop proper plans that can work well in your favor.

While these options may help, several alternative funding options salvage the conditions in the best way ever. The following are some of the best alternative options for startups:

Asset-based lending:

In this arrangement, the asset you intend to purchase is held as collateral for the funds borrowed. Put differently; the lender becomes the owner of the asset until you repay the final payment. The two standard options in this category of financing include leasing and hire purchase.

Business Angels:

These are very wealthy and experienced individuals in the community who are often willing to invest in new businesses. They usually have prior understanding of how the industry operates and this is a significant factor in their decisions to invest in new ventures.

The main problem with this type of financing is matching investors with small business owners seeking finances. The only ways the two can connect is through friends, family members, and business networks. The best thing with business angels is that they never seek control or management positions in the firm. They only perform advisory roles, and it is expected that they are consulted.

Venture capitalists:

If the risks involved are too high, the best alternative financing option is venture capital. It is always perceived as early phase sponsoring of new and young firms with the potential of growing quickly.

Unlike business angels, venture capitalists are supposed to be involved in the management of the business. They always take some shares in the business. Their primary interest, though, is on the business growth and would be glad to see new small firms grow and become large. Nevertheless, venture capitalists do not finance all small businesses. They have criteria for determining which firm to fund.

The following are some of the things they look for in a business before funding it:

The quality of management
Efficient corporate management
Suitable investment structured.

Venture capital can be the best way of financing startups. However, it comes at a cost because new investments always have high risks. If you do not want to lose part of your independence or shares in the business, then do not consider this option.

Venture capitalists always aim at harvesting long-term financial gains. They may opt to harvest after a period of 5-10 years after making the original investment. Small business startup loans can make things complicated for your business.

Family and friends:

If other options are not applicable, you can always turn to family members and friends. Your parents brought you up and seeing you successful will make them happy. If your business is worth their trust, they can willingly invest in it. The good thing here is that parents will not push you the same way bank will if you delay payments.

However, to maintain a healthy family relationship, respect your obligation and try to repay the loan on time. Do not put your family and friends into too many risks. Let them know all the risks the business faces before they decide to invest in it. The major problem with this option is that parents and friends will always feel they have to be consulted when it comes to spending because they loaned you.

Crowdfunding:

This is one of the best and common way of financing new ventures. It involves sourcing funds from friends, clients, family, and personal investors through an online platform. You give your idea to a large number of people, and you will probably find someone willing to finance your venture. It is often referred to as online fundraising and has helped many startups successfully. Small business Startup loans can make things easier for your business.

Grants:

Although it is hard to qualify for these types of funding, they are very beneficial because one will not have to repay them. They are usually provided by the government, though recently some small business associations provide individual grants.

Conclusion:

These six alternatives for small business startup loans discussed in this blog. Consider first the options that you will not be required to repay such as grants. If you need a substantial initial capital, you can go for venture capital and business angels. Whichever option you take, you will be better off than someone using bank loan options.

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What Are the Alternatives for Small Business Startup Loans?