The only way to move on is to accept, and we will acknowledge the economic recession hit us hard. You can tell our economy is not what it used to be and the unemployment rates remain at an all-time high. So many people are trying to make ends meet at whatever cost, and that’s why many have given up on the dream of relying upon cooperate America. But even though the market is open for small business, there’s just one hurdle that’s barring everyone from becoming an entrepreneur: Having access to the required amount of capital.
For the longest time, possible commercial banks used to be the go-to source for those looking for an infusion of cash. But just like every other financial institution, they’ve been walloped by the economic meltdown. Quite frankly, you could say no one got spared when the financial tsunami wiped out everything on its path. Not even the lending institutions! It’s now difficult to get loan approval, and if you meet the underwriting standards, you won’t get the money fast enough. And that’s why not many people still consider banks an option.
The numbers even speak for themselves. The Small Business Administration has a 7(a) loan program that’s in place to aid those looking for funding for various ventures. However, for the past couple of months, things have drastically changed. If the SBA’s 2009 fiscal year reports are anything to go by, you could see the program had a thirty-six percent decrease in the loans made compared to the previous year. That only accounts for 44,221 that banks were willing to offer to individuals who wanted to either start up a business or expand it.
We know such numbers can be discouraging especially to a person who’s aspiring to be a business owner one day, but things are not as grim as they seem. Bank financing is not the only route you can take if you’re looking for ways to fund your startup. Fortunately for you, we’ve drafted this piece to walk you through your options.
Alternatives to bank financing
If you already have a firm and you’re looking to expand, one sure way of acquiring capital is by selling some of the receivables at a discount, of course, so that you can get the cash up-front. It’s one method used by companies with poor credit or those that have to fill orders before receiving payments.
The downside is, this avenue is somehow expensive if you do your math right. If as a firm you want to sell receivables you also have to settle a fee which is a percentage of the total amount. So let’s toss in a hypothetical scenario here and say we want to get funds a month in advance at a three percent fee. Once you do your calculations, you’ll find out that it’s an equivalent to an interest rate of twenty-four percent every year which is ridiculous.
Consider Tapping Into Your 401(K) Plan
Did you know that the retirement nest-egg can be a source of fund? Not so many people want to roll the dice on this one, but those who’ve utilized it in the past have confirmed that it can make a huge difference. And if you’re worried about the law, you ought to know that the ERISA law supports any individual who wishes to spend the existing 401(k) funds on business without incurring penalties. Sometimes this money is never enough, so it’s wise to look for more money elsewhere first to supplement it because if you start a business with inadequate capital, you’ll surely fail miserably. Invest in a firm that you have control over so that you can diversify part of your retirement holding outside the stock market.
Friends And Family
One way of keeping things ultra-simple is by involving family. For one, these are people you trust, and the feeling is most likely mutual, so they will be willing to give you a helping hand. But it might not be the best method considering you’re putting their financial future at risk by turning them into creditors and jeopardizing significant relationships.
If you’ve tried everything else and you feel like that’s the last resort then at least go in already having a well-thought-out business plan. Don’t serve your financial health at the cost of your families and end up straining those relations. Treat them like you would do any other investor and draft a legally binding contract to avoid any misunderstanding.
Give Crowdfunding A Shot
If you haven’t heard about it, then you’re probably in the wrong line of business, pal! It’s the newest craze in town, and this popular concept is how businesses today raise funds. It’s an umbrella term that covers various types of funding from sources all over. Alternatively, we can look at it as a charity extension sponsorship page where regular people in the world of business come together on sites such as Kickstarter, Crowdcube, or Indiegogo, and raise money for startup projects.
Since the donors on these platforms are private citizens, they rarely grill or set strict conditions for the borrower as opposed to an angel investor. Furthermore, you can take advantage of the site and start marketing through word-of-mouth.
Talk about business financing, and right away the newest kid on the block pops up. Yes! We’re talking about this type of lending. For it to work, we have to have intermediaries in between those willing to supply funds (investors) and those in need of them (borrowers). Lending Club and Funding Circle are just but few of the sites that usually act as an intermediary.
As a borrower, you can quickly get access to capital if you choose this channel since we even do have sites that provide feedback on your status in as little as 24 hours. Unfortunately, to get a favorable rate you have to have an impeccable credit score.
The bottom line is the economy is still rebounding so getting bank financing is proving to be a real hassle. Opt for some of these methods but remember to look at the downside before signing any dotted line.