Read the full article at: time.com
Raising money to fund your business can be stressful, especially when you’re not familiar with all that’s available. Now, more than ever before, there are a variety of different options for small business lending.
Here’s five innovative ways to fund your business that most first-time entrepreneurs overlook:
- Private placements. Small businesses can offer to sell equity directly to handpicked individuals. They can also find investors through online platforms, such as AngelList, CircleUp,and EquityNet. There are many platforms to choose from that connect entrepreneurs to accredited investors.
Bottom line: You can potentially raise billions this way. Yet, you will have to share ownership of the business with your investors.
- Community banks. Banks generally offer the lowest interest rates, but getting approval may not always be that easy. Yet, your business will be looked upon favorably if it shows a few years of steady growth and profitability. And, community banks are more likely to approve loans to small businesses that big bank. Contrary to what many small business owners believe, SBA backed loans, which require lengthy paperwork, are not the only option. Many banks will offer standard loans to entrepreneurs.
Bottom line: Banks generally offer the best interest rates, and they don’t require you to give up any equity to get a bank loan. Yet, it’s often hard to get a bank to lend to a startup.
- Online financing sites. There’s a growing number of internet-based financing companies that offer short-term cash infusions via the web. Many are peer-to-peer lenders like Prosper and Lending Club, where both individuals and institutional investors lend you money through the platform, as well as merchant cash advance providers. These lenders offer immediate cash infusion in exchange for a share of your future revenues.
Bottom line: Online lending works fast. You’ll know fairly quickly if your loan is approved or rejected. Yet, these loans don’t come cheap. Your APR can be from anywhere in the low teens to as high as 100-200 percent.
- Hedge funds, endowment funds, and family offices. These types of large investment pools behave similar to banks and often are willing to make long-term loans. Several online platforms such as Biz2Credit, Funding Circle, and Lending Club provide these types of loans.
Bottom line: This type of financing is relatively unknown to entrepreneurs, so the pool of those competing for it hasn’t maxed out yet. The interest rates can be higher than for bank loans, ranging from 8-22 percent a year, compared to a SBA-backed 7(a) loan, which ranges from 5.5-8 percent.
- Third-party loan guarantees. With this type of loan, an entrepreneur teams up with a private investor, known as an angel, to get a bank loan that the angel personally guarantees. The angel gets equity in return for their guarantee. Third-party loan guarantees work well for banks that want to do small business lending while still maintaining their stringent lending criteria.
Bottom line: Third-party loan guarantees can help you get a loan that the bank may not feel comfortable making. Yet, you have to give up equity stake to the loan.
“A look at the fast-evolving options for entrepreneurs on a money hunt—including several that first-time entrepreneurs tend to overlook.”