photo credit: knaakle

Borrowing from banks is every small entrepreneur’s nightmare. One gets turned down for bank loans for a variety of reasons, including lack of assets, collateral and business experience. Don’t despair, however. There are several common types of alternative sources of capital for setting up a business available to young companies.

Savings and Investments

The first source you should consider is your own savings and investments. One disadvantage though of self-financing is that if things did not turn out the way you want them to be it will be your money that goes down with the ship.

Angel Investors

Angel investors are affluent individuals who provide capital for a business start-up, usually in exchange for ownership equity. These individuals are looking for a higher rate of return than would be given by more traditional investments (typically 25% or more).
Angel investors are an excellent source of early stage financing and high-growth start-ups. They are often willing to tread where there is too much risk for banks and not enough profit potential for venture capitalists. And since angel investors are often retired business owners and executives, they can also provide valuable management advice and important contacts.

Peer to Peer Lending

Peer-to-peer lending is a means by which borrowers and lenders may transact business without the traditional intermediaries, such as banks. It can also be known as social Lending, ordinary people lending money. The process may include other intermediaries who package and resell the loans–examples are Prosper.com and Zopa-but the loans are ultimately sold to individuals or pools of individuals. Prosper.com, which is available in the US only, offers business loans for small companies.

An enabling technology for peer-to-peer lending has been the internet, which connects borrowers with lenders, for example through an auction-like process in which the lender willing to provide the lowest interest rate “wins” the borrower’s loan. (wikipedia.com)

Money pool

Instead of a bank loan, borrow smaller sums from several family members, friends, or colleagues. The lenders have no legal ownership in the business, but can act as advisors and cheerleaders for your venture. Remember though that nothing causes tension in a family like lending money that is never paid back.

Credit Cards

Many business owners use their credit cards to fund their businesses. Credit cards offer the ability to make purchases or obtain cash advances and pay them at a later time. But as a long-term financing method, they can be expensive. Most credit cards will charge you 2% to 4% of the face value of a cash advance as a “fee” making this method of financing very risky.

Bootstrapping

Another source of capital for setting up a business is bootstrapping. It is a way to finance a business by saving rather than borrowing money. It’s being as frugal as possible so your business can be started on as little cash as possible.

The use of private credit cards is the most known form of bootstrapping, but a wide variety of methods are available for entrepreneurs. Other forms of bootstrapping include owner financing, minimization of accounts receivable, joint utilization, delaying payment, minimizing inventory and subsidy finance.

While bootstrapping involves a risk for the founders, the absence of any other stakeholder gives the founders more freedom to develop the company. Many successful companies including Dell Computers were founded this way.

Venture Capital

Venture capital is not suitable for all entrepreneurs. It is an option for small companies that have a seasoned management team and very aggressive growth plans; however, venture capitalists will rarely invest in small businesses that have no intention of going public. If a company does have the qualities venture capitalists seek such as a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.

The venture capitalist objective is to invest in a company for a short period of time – say 5 years – and then cash out of the business while making a significant return on their investment.

Amy Grace Remollata is working for http://www.agentsofvalue.com, a webmaster staffing company located in the Philippines. Her current project is for http://www.prosper.com, America’s first online marketplace for people to people lending.

photo credit: mgaffney

Christmas is around the corner, wild spending defies every logic and bills are being pushed forward, next years resolutions are to cut down on unnecessary goods and to be wise with money.

You fake a smile and try to be merry, deep down you only know how you are struggling to make meets end.

If things were not bad enough, your brother has asked you to lend him some money, so what do you do in such a situation.

Bad credit is a causing you concern because you were just about to apply for a loan.

If you have been a good customer for a long period and the banks have accounts of this, then instead of personal loans with bad credit you might try to look for an overdraft facility or an extension on your existing loan.

How bad is bad credit?

Bad is not bad at all nowadays, in fact it is good to be bad, you get to choose from so many options.

Put it like this, bad credit is become an acceptable standard, as long as it’s not cause for concern.

What could be cause for concern?

Well if you are in full time employment and have kept payments stable, your situation has not swung drastically from left to right. There should be enough positive response from the banks to apply for a personal loan.

The only reason why personal loans are awkward to achieve is because of customer’s own background and they often have nothing to back up the application.

Personal loans, bad credit and overdrafts fall in the same categories.

What are the options?

* Payday loans
* Overdrafts
* Re-mortgages
* Secured personal loans

Documentation?

Your bank might need to see proof of tackling bad credit, and your personal credit history and efforts in improving the situation.

So always keep all correspondence and documents in a safe and secure place.

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photo credit: the_toe_stubber

First of all, it’s a credit crunch not a credit freeze!

Sure, banks are more cautious about their lending, but when were they not? The reality is that the majority of banks are lending, and to remain profitable they will continue to lend to small business owners. Those that understand the situation are acting now!

“Buy low, sell high”

With the current economic low, it is the best time to get financing at a low rate, with lower-than-ever requirements. Big banks like Citi and HSBC are making their decisions based on business credit scores, not personal fico’s.

Personal guarantee is a promise made by an entrepreneur to personally repay company debts if the business defaults. It is a way for banks to protect themselves, while reflecting the seriousness of the business owner to repay debts. Without a personal guarantee, they are thought to not believe in their business and are high risk. Small business owners don’t want to provide a personal guarantee if possible. Even if they are diligent about repaying debts, some unforeseen catastrophe may happen preventing a loan payment. Then the bank seizes personal assets.

Using personal money and assets for financing involves a risk in damaging personal credit because the credit score reflects every time a financing inquiry occurs. The more business credit is personally guaranteed, the less likelihood of getting any future credit for personal use.

Banks might be willing to waive the necessity of a personal guarantee if they have the assurance that a business can stand on its own. They need to see history of excellent business credit, continued growing and increased revenue.

Regardless of personal credit history, the goal is to limit use of a guarantee, to build business credit, to no longer use personal credit, to limit personal liability, and to protect personal assets from any business losses. Business credit provides greater access to company purchasing and lower interest rates on loans, therefore saving money.

To get good business credit without personal guarantee, a company must register with all three business credit reporting agencies, find vendors, suppliers and credit card companies to give some credit for the business without using a personal credit score. They must ensure all business payments are reported to the credit bureaus so they can track keep track. The goal would be to attain a minimum of 75 rating in credit, and minimum 630 FICO score, based on payment history and trade references. Apply for 3 to 5 retail business credit cards that don’t require a personal guarantee.

Lenders look for current payment history, D & B rating, years in business, trade and banking references, aging receivables, business tax returns and sometimes owner/office credit score.

Ilya Bodner’s Specialties:

Leadership, Enterprenuerial Spirit and Mind, management, negotiation skills, determination for success, understanding and willingness to work hard

Sincerely,

Ilya Bodner
Small Business Owner
Initial Underwriting Group

*Breaking Down The Barriers To Small Business Financing*

http://www.initialunderwriting.org