If you were to read just the news, you'd think venture capital was the only route to finance your business. Yet, in reality, the majority of startups don't see a dime from outside investors.
While, seeking cash from deep-pocketed venture capitalists can provide the necessary funds for building your business, you'll have to give up a both equity and control -- two things that may not sit well with every entrepreneur.
For those entrepreneurs who want complete ownership of their startup or are unable to get the attention of investors, there are other options for financing your startup. Below is a breakdown of three common alternatives to venture funding and some tips on how best to utilize them:
Small business loans
If you need a large amount of capital, a small-business loan can provide hundreds of thousands of dollars to pay for equipment, land and labor.
The main benefit of many small-business loans is they can give you access to a lot of money at a low cost. For example, the average Small Business Administration loan in 2012 topped $300,000, and the interest rate on SBA-guaranteed loans with a term of less than seven years can't exceed a 2.25 percent over the prime rate.
It may not be all rosy on the loan front. Depending on your needs, a working-capital loan or revolving line of credit might make more sense. With a regular small-business loan you might find that you borrow (and pay interest on) more than you need.
Plus, these loans can also be difficult to obtain, as often businesses need to present at least two solid years of financials before a bank will even consider them. Still, approval rates have improved in the last year -- with big bank approvals hovering at around 18 percent in August, up from 11 percent for the month in 2012, according to the Biz2Credit Small Business Lending Index, a monthly breakdown of 1,000 loan applications from online credit resource Biz2Credit. Rates are picking up at small community banks as well, notes the researcher.
Tip: If you decide to go this route, consider going with a lender with which you already have a relationship, as this dynamic could help increase your chances of getting approved.
Business credit cards
If you prefer the flexibility of a revolving line of credit, you can avoid paying extra interest on expansive loans by utilizing business-credit cards. For example, if you are paying a worker during a short, lean period or investing in a small-dollar marketing campaign you can turn to business credit cards.
The benefits of business-credit cards don't stop at a flexible line of credit. They can also be helpful with bookkeeping, as most cards offer some sort of expense tracking feature. Many also earn rewards on typical business purchases like office supplies and travel and occasionally provide perks like airport-lounge access.
On the downside, almost all business-credit cards require that you personally guarantee your line of credit. This means that even if your company operates as a limited liability company -- and you're not held personally liable if your company defaults on its small-business loan -- you will still have to pay off your credit-card debt if the business goes south. Moreover, since credit-card debt is unsecured, the interest rate is often higher than with a collateralized loan.
Tip: Look for a card that has a low annual percentage rate, or at least one with a low introductory rate on purchases for at least six months.
Personally guaranteed loans
If you don't qualify for a small-business loan and don't want the high-interest rates of a business-credit card, you can increase your chances of gaining approval by personally guaranteeing a loan with collateral, which can include a home or car note. Keep in mind that a personally guaranteed loan means that you -- not just your company -- are liable for the debt.
This isn't an option to be taken lightly, but if you're willing to go whole hog and exhaust the alternatives, it may be your last best option.
Tip: When comparing personal loans, determine the highest monthly payment you can comfortably make. Then find the lowest-rate loan with a payment at or below your limit.
Be sure to review your credit history for errors and pay off your credit cards before you apply. This will ensure that your credit score is as high as it can be, allowing you to snag the best possible rates.
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