SCORE Small Business Blog

Need financing to start or grow your business?

If you’re starting a business that requires significant financial investment up front, finding a source of funding can be a challenge. Many start-ups and new small businesses often find they may not qualify for a traditional small business bank loan. Without a proven track record of 3-5 years under your belt and/or established business credit, many banks simply won’t take the risk. But before you risk your life savings or remortgage your home, you should know about some possible alternatives.

Here are five ways to finance your small business that you may have overlooked:

1. Borrowing from Family or Friends

Angel investors don’t have to be large corporations seeking a healthy return from a growing business; friends and family are a surprisingly common source of funding for many start-ups. Unlike private investors or banks, these people know and trust you, and often they have quicker access to cash. On the flipside, however, things can quickly go awry if you don’t plan your approach and set some mutual ground rules for investments and repayments from the get-go. Consider the following:

• Choose your lender carefully – Your parents may be the people you’ve always turned to for money, but you will be better positioned if you select someone with business skills who understands the risks and benefits of what they are getting into.
• Act like a proper business owner – Show that you’ve done your research. Present a business plan and prove you have a path to profitability.
• Be realistic about how much financing you need – Break up the money you need into chunks to make the investment more palatable for your financier. For example, how much do you need to get to a certain point in your business plan? Once you’ve shown that you can be trusted to repay that amount, you’ll be on better footing to ask for additional funding should the need arise.
• What are you offering? – Financiers usually want something in return, so consider whether you want a straight-up loan with repayment terms or are willing to offer a friend or family member a share in your business. If you are seeking a loan, work out a repayment plan in advance. You could even structure it through a peer-to-peer lending service to ensure automatic payments are made each month.

2. Peer-to-Peer Lending

Peer-to-peer-lending (P2P) involves pitching your business idea to other people in hopes they will invest in your business. Sites like Prosper or Lending Club connect people who want to lend money with those who need to borrow money – often in increments as low as $25. Quite literally, you determine how much you need to borrow, define the purpose of the loan and post your listing online.

3. Crowdfunding

Kiva.org is a popular example of a crowdfunding business-financing model, whereby a collective cooperation of lenders pools their money (usually online) to help entrepreneurs reach their financing goals. Crowdfunding has become much easier and more popular in the U.S. since the passing of the Jobs Act in 2012. Previously, small businesses were limited to seeking investment from SEC accredited investors only; now non-accredited investors (i.e. anyone) can invest in a start-up to the tune of up to $1 million a year. Examples of crowdfunding services include Kickstarter, Wefunder, Crowdfunder and RockthePost.

4. Microloans

If you need financing in the range of $500 to $50,000 you might want to consider a microloan. Microloans are a good fit for businesses with smaller start-up capital needs and, unlike traditional bank business loans, funding is provided via community-based, nonprofit microfinance institutions.

Microloans are often granted to business owners with low cash reserves or poor credit as well as those in rural or disadvantaged communities. However, many micro-financing institutions also offer specific micro-financing programs for women-owned businesses, environmentally responsible businesses, veterans and other specific business types.

The U.S. Small Business Administration (SBA) offers a popular microloan program; however, microloans are also available via several non-profits including Accion USA, Kiva and the Communities at Work Fund.

5. SBA Loan Programs

SBA Loan Programs are another alternative to traditional bank loans. SBA doesn’t provide the money; instead it provides a guarantee to banks participating in its programs that SBA will cover the money these banks lend to small businesses, if the business is unable to repay that loan.

SBA has a variety of loan programs, and each is developed to suit individual business needs such as start-up funds, exporting assistance funds, disaster recovery and more.  To help you find a loan program that fits your needs, a good place to start is the SBA Loans and Grants Tool—with a few clicks, you can get a picture of the loan programs for which you may be eligible.

U.S. Small Business Administration The SBA is an independent federal agency that works to assist and protect the interests of American small businesses. The agency delivers the answers, support and resources small businesses need to start-up, grow and succeed through district offices throughout the U.S. and a network of resource partners including SCORE. www.sba.gov | Facebook | @SBAgov | More from the SBA