According to Statista, many small businesses in the U.S. experience cash flow issues due to reasons such as poor budgeting, lack of capital, natural disasters, and lack of demand for products. For such businesses, financing is vital. However, mainstream lenders, such as banks or credit unions, typically require borrowers to meet stringent borrowing requirements. For instance, borrowers have to provide cash flow statements, collateral, and credit scores upfront. Unfortunately, these requirements often make it difficult for small businesses to obtain funding through mainstream lenders. Do not get dismayed, as there are several other alternative sources of business financing.
Here’s a look at five inventive financing methods and resources for your small business.
Friends and Family
For a small business, borrowing money from friends and family remains a steady option, especially if you have a good rapport with them. This is because, while some may lend you the money without interest, others will choose to offer their contributions as a gift. Any business financing from friends or family should still be treated with a contract and repayment plan as necessary. While this can be an easy option for financing your business, take note that failure to honor your repayment agreement runs the risk of ruining your relationship with your friends and family.
A recent study by the National Small Business Association (NSBA) found that at least 30% of business owners in the U.S. use their credit cards to fund their businesses. While this is a viable option that leaves funding completely up to the owner, there are risks involved. It is important to note that credit card debt is high-interest debt, and therefore, you should only use your credit card to fund short-term business needs that do not require a lot of money.
Non-Profit Lending Agencies
The interest rate on a business loan depends on factors such as the amount borrowed and the duration of the loan. Depending on the size of the interest rate, you may end up repaying much more than the amount you originally borrowed. To avoid this, consider taking a low-interest or interest-free loan from non-profit agencies. This way, you will get to fund your business without incurring significant additional expenses. Most non-profit agencies will require you to prove your ability to repay the loan, demonstrate the need, give an estimate of your expected cash flows and present a viable business plan. Did you know the Economic Development Collaborative has multiple loan funds with low-interest rates? Our EDC Loan Program supports small businesses across Ventura and Santa Barbara Counties.
Community Development Financial Institutions
Community development loans are generally easy to apply for, especially if they involve smaller amounts. However, the interest rate involved may be high since they are riskier than the typical bank loans. That said, take advantage of the flexible pricing and simple underwriting measures that come with community development funds and enable you to grow your business.
Crowdfunding involves a large number of people contributing small amounts to raise a large figure for business support, mainly through the internet. Generally, crowdfunding is a popular business financing method with a large market in the U.S. and beyond. For instance, data from Statista shows that the average amount raised through crowdfunding campaigns in the U.S. in 2016 was $32,000. While this may not seem like a lot of money, it is sufficient to enable a small business to stay on its feet. To make the most of your crowdfunding campaign, ensure you partner with other organizations and be transparent regarding your business plan.
These are some of the financing methods and resources to help your small business grow. Looking for no-cost financial consulting? Contact the professionals at Economic Development Collaborative. Our qualified business advisors are here to help your small business grow even during the pandemic.