Only Those Who Have Money Can Borrow Money

Here is a typical story: A passionate would-be entrepreneur launches a venture, often with the romantic and exciting intention of bootstrapping the finances.  But realistically, bootstrapping is not the correct description of the financial plan.  The term that applies here is under-capitalized.  The idea may have been realistic,  but before our intrepid entrepreneur could get traction with the concept, the money ran out.  The only thing remaining was debt.

Our hero would like to start over, since valuable lessons were learned and baked into business plan and model 2.0.  However, start-up capital that was not requested in the first go-round must be sought now, because the realization that there will be no success without adequate funding is now apparent.  What can be done to give our story a happy ending in a world where it takes money to make money? Let’s take a look at some possible funding options, some common and others less so.

Friends and family financing

Besides your own bank account, the most obvious place to look for start-up capital is with friends and family, that is, if you have a very good idea of whom you can do business with and those relatives or frenemies who must be avoided.  Many business ventures are funded in this way.

If you choose to borrow from family and friends, put into writing the loan amount, terms and repayment schedule and agree only to what you are certain you can uphold.  According to CircleLending’s Business Private Loan Index, the average current interest rate on business loans made by family members and friends is 7.6%.  Do everything possible to preserve relationships and not let money divide you.  The last thing you want are tense holidays (there are more than enough ways for that to occur as it is).

Micro-lenders and web-based lenders

There are several non-bank lenders found only online that offer micro-loans to small entrepreneurs.  The loan amounts are usually between $5000 – $25,000 and these outfits can be excellent sources of start-up and expansion capital for entrepreneurs with debt and /or limited resources.  There is sometimes a potentially very useful credit repair feature available through certain of these lenders when loan repayments are reported to credit bureaus.  On-time payments will raise your credit score, improve your credit rating and lower your future interest rates.

Here are sites to visit, including the Small Business Association’s Micro-loan Program:  http://prosper.com   http://www.zopa.com   http://www.accion.com https://www.sba.gov/loans-grants/see-what-sba-offers/sba-loan-programs/microloan-program

There may as well be small not-for-profit organizations that are micro-lenders in your state, but they may not be found online.  To obtain contact information on these loan source possibilities, please visit  www.microenterpriseworks.org

CircleLending data demonstrated clearly that comparison shopping is a must-do.  The loan interest rate at Accion was 12%, while the rate at Prosper was more than 20%, for those with poor credit.

In 2016, the National Small Business Association found that 73% of small businesses used some type of funding to launch a venture, expand a business, purchase inventory or equipment, or strengthen the company’s financial foundation.  The 2012 U.S. Census Bureau Survey of Business Owners found that 57% of start-ups launched the venture with personal savings; 8 % used personal credit cards; 6% used other personal assets (retirement account?); and 3% used a home equity loan. Only 8% used a bank loan.

While it is possible for individuals who are in tight financial constraints to obtain bank loan financing and business credit cards as noted above, interest rates are high.  More than that, even those who might qualify for bank loans are not going there.  You want to put your money not into interest payments, but rather into building your venture into a successful enterprise and paying off debts, in that way positioning yourself to save and invest capital and build for yourself a strong financial future.

Thanks for reading,

Kim

Triple Dollar Signs, Andy Warhol (1982)   Christie’s Images, Ltd.

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