Looking to Secure Business Financing? Check Out These 3 Approaches
In a country that prides itself on creativity—and rightfully so—people are constantly thinking of new business ideas. Some of them are truly novel and practical but they need capital to get off the ground. This is the first obstacle that the entrepreneur must overcome.
When business people with a fresh idea hit the pavement in search of financing money, they have a few choices available. There is the bank. There is crowd founding through websites like Kickstarter and GoFundMe. There are also cash-advance companies who promise funding within five days and then find ways to compromise your enterprise. The loans from these types of companies usually cost 30 to 40 percent in interest. They end up siphoning the small profits that a nascent company makes.
According to Raoul Davis, writing in Forbes, there are three lesser-known strategies to secure business financing.
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1. Create Alternative Loan Arrangements for Friends, Family, and Business Partners
Traditionally, entrepreneurs have asked people for money in exchange for equity. Equity does not have the appeal it once had, however. If the company isn’t profitable, the annual profit share is just a fraction of their investment.
What investors are looking for is a worthwhile ROI. One thing you can do is offer a revenue share to pay them back. For a $20,000 loan, offer a 3 percent revenue share at a payback of 20 percent. This means they get 3 percent of your revenue until you pay them back a total of $24,000. This is much better than equity because your investor sees money every month and they get a decent ROI.
2. Use Term Insurance to Secure a Small Business Loan
What banks usually want from a small business owner seeking a loan is a life insurance policy.
Quoted in Forbes, Brian Greenberg, CEO of True Blue Insurance spells out how having term insurance is a good thing for small business owner. “I have seen business owners struggle to qualify for insurance and pay a huge amount of premium to secure a much-needed business loan. If business owners already have term insurance, they can use it to secure small business loans or construction loans whenever the need arises. When the business owner has a large policy, they can simply assign the required benefit to the loaning bank in order to get the loan.”
3. Accept That Entrepreneurship Is a Full-Time Job
You need to deploy all your personal skills and resources to making your business work. This is what Meisa Bonelli, Managing Partner of Millennial Tax, did. As described in Forbes, “[she] used her savings and tax savvy to make the leap from employee to business owner. When Meisa started her first business, a vacation rental business in New York (pre-Airbnb), she did it with savings and recouped her investment through tax refunds. This is the type of strategy that requires a formal plan and diligent record keeping in case you’re ever audited by a tax authority.”
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You may not have savings and be as tax savvy as Meisa, but you have your own skills and abilities nonetheless. Understanding that entrepreneurship is a full-time job means learning to put your gifts to work until you get the desired result.
Neither business nor getting your hands on capital is easy, but it’s not impossible either. Davis asks us to also be careful, however. “Sometimes capital isn’t what you need. Instead, you need a better business model that produces revenue faster. Don’t let seeking capital become your crutch.”