Alternative Funding for Entrepreneurs

Many entrepreneurial success stories begin this way: X had a dream, but his dream was turned down at the local bank. This is a situation that many entrepreneurs face. While it can be scary, it does not have to be a dead end. The reason so many success stories begin this way is that it is actually very difficult to get a bank loan to start or expand a small business. However, there are alternate forms of funding that can help you achieve your dreams. It’s just a matter of knowing how to approach them.

How To Fund Your Entrepreneurial Dreams Video

The first question to ask yourself is a hard one: why did the bank reject you in the first place? Here are a few reasons.

• No prior relationship. In some cases, the rejection comes because you do not have an established relationship with the bank. Banks prefer to extend loans to their own patrons. They can easily see your financial history and already have a relationship with you. This was not as important in the days of easy credit, but it has become increasingly important as small business loan funds dry up.
• Poor presentation. You need to package your entrepreneurial dreams as a sure thing. This means showing that you have done your homework. Do you have a professional business plan? Have you investigated the market for your product or service? If insufficient or poorly presented information is the reason for your rejection, it will be a barrier with other funding sources as well.
• Too much risk. Banks have been burned by defaults, which is making the institutions increasingly wary. If you simply are presenting top much risk, there is little that you can do to change this. It is a seller’s market for loans right now, with far more demand than available funds. Many banks are looking for as much as two years of consistent revenue before they throw their own money in the pot. If this is  the case, you will simply need to find alternative funding.

Many lenders are not shy about letting you know why they are rejecting your application. Talk to your loan officer to see what the problem is. This will be very important in getting alternative funding because you will often be able to correct the situation before exploring other avenues. Here are a few sources to consider.

• Angel investors. The banks are unwilling to finance your dreams because they don’t know you. They don’t know how motivated you are, or what skills you bring to the table that will make you a better-than-average entrepreneur. However, you probably have friends, family and acquaintances who know these things about you. Consider asking one or more of these people to invest in your business or become a silent partner. This is a difficult step to take because financial relationships can interfere with personal ones, but it may be the only way to make your business dreams see the light of day. Just make sure your agreement is spelled out clearly in a contract so both sides feel protected.
• Microfinance. Because small business loans are becoming increasingly difficult to get from large financial institutions, there are smaller businesses offering loans within set geographical area. You can usually find ones in your area by contacting your local Chamber of Commerce or your city government. Microfinance lenders are usually nonprofit organizations that have been given grants to boost local businesses. Often, they offer not just loans, but a wide array of services and information for entrepreneurs. Some also help to link up potential entrepreneurs with angel investors.
• Crowdfunding. This is one of the newer ways of getting a loan, but it is also one of the fastest growing. Crowdfunding is almost exclusively online. It usually focuses on peer-to-peer lending, with a large base of lenders each loaning a small amount to your entrepreneurial venture. One thing to remember is that many of these websites will check your credit record and set your interest rates accordingly. Others let you set your own interest rate. Some charge fees, while others do not. Even though these are largely philanthropic ventures, you still may not be getting the best possible deal. Each site is a little different, so shop around before you decide that this avenue is right for you. If you are interested, check out sites such as Prosper and Kickstarter.
• Seller financing. If you are not starting a business but rather buying an existing one, seller financing may be a possible funding source. The market for businesses is similar to that for real estate—that is, tanked. Many sellers are willing to consider alternative payment structures or receive their payment in several payments rather than in just one. This is becoming increasing common right now, so don’t be afraid to ask about it.
• A side job. Running a business is hard work! While you probably feel exhausted enough at the end of each working day, getting a side job (or keeping your day job for the time being) may be the only way to finance your entrepreneurial dreams. One way to make your money really work for you is to use your earnings to set up an account at a local credit union. Place your earnings in this account. After several months, you will not only have a decent amount of money for your small business ventures, but a relationship with a potential lender. Local credit unions are often more generous with loans, especially when dealing with members.
• Lean operations. If you have some start-up money already, you may be able to open shop with only your own funds if you can keep costs low enough. Many small businesses now are starting with less than $10,000, so you will certainly not be alone. You can also break down your business’s opening into phases, financing each one as you have the ability. Few people can afford to open a business in the traditional manner anymore, but this does not have to stop you from achieving your dreams.