Starting your own company can be a daunting but rewarding process. While a great business plan is crucial for founders, financing is one of the most important elements a company needs to succeed.
However, financing a startup or small business can be a difficult, drawn-out process, especially for those with poor credit. While there is no standard minimum credit score you must have to get a business loan, traditional lenders have a range they consider acceptable.
If you have a low credit score and no collateral to offer, consider an alternative loan. In this article, we break down 10 small business funding options, examine the benefits of alternative lending and provide tips on how to finance your business.
1. Community development finance institutions
There are thousands of nonprofit community development finance institutions (CDFIs) across the country, all providing capital to small business and microbusiness owners on reasonable terms, according to Jennifer Sporzynski, senior vice president for business and workforce development at Coastal Enterprises Inc. (CEI).
2. Venture capitalists
Venture capitalists (VCs) are an outside group that takes part ownership of the company in exchange for capital. The percentages of ownership to capital are negotiable and usually based on a company’s valuation.
“This is a good choice for startups who don’t have physical collateral to serve as a lien to loan against for a bank,” said Sandra Serkes, CEO of Valora Technologies Inc. “But it is only a fit when there is a demonstrated high growth potential and a competitive edge of some kind, like a patent or captive customer.”
The benefits of a VC are not all financial. The relationship you establish with a VC can provide an abundance of knowledge, industry connections and a clear direction for your business.
3. Partner financing
With strategic partner financing, another player in your industry funds the growth in exchange for special access to your product, staff, distribution rights, ultimate sale or some combination of those items. Serkes said this option is usually overlooked.
“Strategic funding acts like venture capital in that it is usually an equity sale (not a loan), though sometimes it can be royalty-based, where the partner gets a piece of every product sale,” she added.
Partner financing is a good alternative because the company you partner with is usually going to be a large business and may even be in a similar industry, or an industry with an interest in your business.
4. Angel investors
Many think that angel investors and venture capitalists are the same, but there is one glaring difference. While VCs are companies (usually large and established) that invest in your business by trading equity for capital, an angel investor is an individual who is more likely to invest in a startup or early-stage business that may not have the demonstrable growth a VC would want.
Finding an angel investor can also be good in a similar way to gaining funding from a VC, albeit on a more personal level.