Boss Lady

Why you don’t need a loan to start a business

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Starting a new business is a lot of work. You’ve got business plans to hash out, employees to hire, supplies to procure, and more. Amid all that (as if that’s not enough!), you’ve got to secure the funds to actually pay for everything. It’s enough to make anyone’s head spin.

Getting approved for financing can be one of the most stressful parts of getting a startup off the ground, and it can leave founders stuck with a large amount of debt if the business doesn’t take off. On top of that, many of the traditional channels for business funding look at your personal credit history as part of loan approval, even if the loan is for your business. If your personal credit isn’t great, this can make it hard to get approved, even if your business plan is bulletproof.

Alternatives ways to fund your business

Fortunately, there are a lot of alternative lending options available to founders that don’t want to, or can’t, go through a bank. Many of these options have more relaxed requirements for getting funds, and some of them won’t even look at your credit score: they’ll base their decision on how much they believe in your business plan or product. Some of the most popular choices are crowdfunding platforms, angel investing, and peer-to-peer lending.

  1. Crowdfunding

What is crowdfunding? At its core, crowdfunding is exactly what it sounds like: sourcing funds from multiple  investors. This could be as simple as a group of friends or family members, but these days, crowdfunding more often refers to using an online platform to attract investors to your startup.

There are numerous crowdfunding platforms on the web. The most popular and widely-known are Kickstarter and Indiegogo. Another notable site is Patreon. Which you should choose largely depends on the type of business you’re trying to start—Kickstarter and Indiegogo are popular for getting new products to market. Patreon is excellent for creative businesses, like photography, videography, and art.

The biggest advantage of crowdfunding is the ease of getting your idea out to a huge pool of potential investors. You create your campaign and put it out there, and everyone on the platform can take a look at it. It’s a much more efficient process for getting the word out to your investors than going to individual lenders to make a pitch.

  1. Angel investors

An angel investor is a private investor that provides financial support for a business, often in exchange for part ownership of the company. This is a form of equity financing—rather than expecting their investment to be paid back as a debt, they take equity in the company as payment for funding. Common sources of angel investment include friends and family and business partners. You can also find potential investors at your local Chamber of Commerce.

For business owners, angel investment presents distinct pros and cons. The biggest advantage of financing from an angel investor is that there’s very little risk. Since this type of funding isn’t a loan, there’s no need to worry about paying off debts in the event the business fails.

The tradeoff is that the owner sacrifices complete control of the business: since the investor is taking equity as payment, they now have a say in how the company is run. They’ll also receive a portion of the profits when the business is sold. For this reason, it’s very important to clearly communicate expectations prior to accepting an angel investment.

  1. Peer-to-peer lending

Peer-to-peer (P2P) lending is sort of a mash-up of angel investing and traditional loans. A peer-to-peer loan is one made by an individual investor, but instead of providing equity in exchange for the loan, you pay the loan back to the investor.

Most P2P lending is done on websites that serve as a central marketplace to shop for loans. Prosper and LendingClub are two popular P2P lending marketplaces where prospective business owners can get loans to fund their ideas. Whichever site you choose, it’s a good idea to do your due diligence before giving out personal information. Make sure the site is encrypted (look for either “https” or a lock icon in the address bar) and look around for reviews by others that have used the service.

P2P lending has a few advantages over a more traditional option: first, interest rates tend to be lower. This is mostly due to lower overhead: these lenders don’t have to worry about paying for the infrastructure and other expenses that a bank typically has. It’s also (usually) a much quicker process than applying for a loan from a traditional financial institution. You may be approved and have your funds in as little as a few days.

Whether you’re a serial entrepreneur with several successful businesses under your belt or you’re brand new to the world of startups, getting funding is one of the first major hurdles you’ll have to jump over. Luckily, there are plenty of alternative options that are both easier to apply for and easier to get approved for than old-fashioned bank loans. Business owners have never had more options for financing, which lets you focus less on the paperwork and more on the important work of running your business.

About Madison Crader

Madison Crader is a Salt Lake City native who specializes in helping small business owners build brand awareness and make the right decisions to grow their business. She has a passion for helping entrepreneurs understand their financial needs and set long-term goals by sharing tips and tricks. Check out some more of her writing!

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