Whether you need funding to grow your business or merely get off the ground, a Small Business Administration (SBA) loan is only one of many options available to you. Before deciding on which source of capital to use, carefully consider each possibility.

What are the alternatives to a SBA loan?

Most of us are familiar with borrowing money for personal reasons. However, you’ll have a few more choices for obtaining funds for your small business. Here we’ll cover the most common sources of getting capital as a small business owner.

Your own funds

Always evaluate whether you can provide your own funds before taking out another loan. Also known as ‘bootstrapping’, self-financing is the most common form of raising capital for business start-ups.

If you’re already in business, can you sell some assets for cash? If you’re just starting up, you may be able to quickly gather your own funds together by:

  • Continuing to earn and save a salary – from your full time job, until you have enough funds to launch.
  • Using the funds in your individual retirement account (IRA) – you’re entitled to withdraw money from your IRA so long as you replace it within 60 days.
  • Borrowing against your 401(k) retirement plan – if you have one. You might be able to borrow up to 50 percent of your balance, up to $50,000 maximum.

If you have to seek the funding of other financing sources like banks, the government or venture capitalists, they’ll want to know exactly how much of your own cash you’re planning to invest in your business.

Friends and family

Your friends and family can often be a first option for seeking finance as they’re easy to approach and want to see your business venture do well.

You’ll probably be able to borrow money for little or no interest, giving you a huge advantage as you look to establish or grow your business. But do take care as owing money to people you know isn’t always the best idea. For example, if the lending rules aren’t openly talked about and written down from the beginning, you could end up with a family conflict later on.

A bank loan

Speak to your bank manager about what options they have for financing your small business. Compared to a SBA loan, funding from your bank will almost certainly be:

  • Easier to apply for.
  • Faster to access.

Do you have any spare equity in your house that you could utilize? This is one of the most used forms of raising capital for small businesses – and it’s often the cheapest. Your bank’s interest rates for a loan (that uses your property as security) is likely to be cheaper than unsecured finance.

Crowdfunding

Crowdfunding is one of the newer avenues for businesses to take when raising capital. The concept behind crowdfunding is to let prospective entrepreneurs seek capital from many investors in small amounts online.

Make sure you research your options thoroughly before choosing a crowdfunding platform to seek investment through. Fundable and Crowdfunder are just two of many popular crowdfunding platforms focused on US start-ups.

Angel investment

Angel investors are successful individuals (often other business owners) who’re interested in investing their own personal funds into promising small businesses. They’ll want to invest funds in your business if it has high growth prospects.

It can be helpful to search for angel investors that have expertise in your industry, as they’ll be interested in contributing their own skills to your business. They usually prefer to invest in businesses they’re familiar with, wanting either a return on their investment, some equity, or both.

The great thing about angel investors is that they’re usually keen to invest at an early stage, which can help with your start up. They bring their own experience to the table, which is knowledge you should consider taking advantage of.

Venture capital

As you look to start up or grow your business, a venture capital firm might be able to offer you much needed funding.

Venture capitalists will be looking for substantial returns during a high-growth phase of your business. They’ll also want a certain degree of control in your business, to protect their investment.

However, they’re usually looking to invest larger sums of money, which could be above and beyond what you need, and their requirements are much tougher than those of angel investors.

Preparing your business to raise capital

Regardless of where you decide to source the funds your business needs, it’s best to be as prepared as possible. These tips will help you present a strong business case to whomever you talk to:

  • Speak to advisors – your business banker, lawyer and accountant are all people you should consult.
  • Build your business case – review your business plan and present it well. Define your goals, how you’re going to achieve them, why you need capital and how much you require.
  • Show you’re unique – highlight what will make you stand out. Showcase your competitive advantage and point of difference.
  • Look for leverage – don’t necessarily go with the first person that offers funding. Make sure you’ve done your due diligence on all potential investors so you can decide the best option.
  • Consider the risks – you’re going to have to hand over some ownership if you decide on the equity option. Make sure you’re comfortable with this.

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